Wiley GAAP: Practical Implementation Guide and Workbook

Chapter 19. LEASES (ASC 840)

BACKGROUND AND INTRODUCTION

This Standard prescribes the accounting treatment for leases in the financial statements of lessees and lessors.

DEFINITIONS OF KEY TERMS

(in accordance with ASC 840)

Bargain purchase option. A provision allowing the lessee the option of purchasing the leased property for an amount, exclusive of lease payments, which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable. Exercise of the option must appear reasonably assured at the inception of the lease.

Implicit interest rate. The discount rate that, when applied to the minimum lease payments, excluding that portion of the payments representing executory costs to be paid by the lessor, together with any profit thereon, and the unguaranteed residual value accruing to the benefit of the lessor, causes the aggregate present value at the beginning of the lease term to be equal to the fair value of the leased property to the lessor at the inception of the lease, minus any investment tax credit retained and expected to be realized by the lessor (and plus initial direct costs in the case of direct financing leases).

Incremental borrowing rate. The rate that, at the inception of the lease, the lessee would have incurred to borrow over a similar term (i.e., a loan term equal to the lease term) the funds necessary to purchase the leased asset.

Lease. An agreement conveying the right to use property, plant, or equipment (land or depreciable ...