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FAR: Leases, Derivatives, Foreign Currency, Income Taxes: Lessee and Lessor Financial Statements - YouTube
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All right scholars we're now going to take
a look at how the various transactions
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have a net impact on your balance sheet
and on your income statement. Let's
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first of all start with the lessee and
remember there are two types of capital
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leases. There's the operating capital
lease and there's the finance capital
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lease. When is it a finance capital
lease? When she owns it, ownership
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transfers, written bargain, net present
value, economic life or specialized
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asset. Any one of those met and it's a
finance capital lease. All of them
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missed, it's an operating capital lease.
So let's take a look. When you initially
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set it up, obviously cash goes down, the
asset that you're capitalizing goes up,
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the liability goes up originally and then
of course with each payment the liability
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goes down. And of course you amortize
the actual asset. Now we don't call it
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amortization, if you recall in my
lectures I incorrectly but for
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descriptive purposes I call it
depreciation. I know it's called
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amortization but I'm going to call it
depreciation. So we depreciate the asset
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and of course we have interest on the
liability. But we combine the two of
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them and treat it as lease expense. Now
if it's a finance capital lease same
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thing, cash goes down, you have the asset
being capitalized and then depreciated,
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you have the liability and then you're
paying it off with interest. Notice
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you'll have two expenses that get
reported on the income statement. You
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have the lease expense which is going to
be the interest on the item, there's your
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interest expense. And then you're going
to have the asset being depreciated. So
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you'll have the asset being depreciated.
Remember the correct term is amortize but
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I'm incorrectly calling it depreciation
to hopefully help us understand it. Well
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what about from the lessor's point of
view. Look at that man, Mr. Olinto, all
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maybe he's a mini-me, I don't know,
maybe. Anyway you'll notice they have 3
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different types of leases. They have the
sale type, that's the one in the middle,
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that's when you're giving away all of the
risks and rewards. And remember that
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criteria was simply if the lessee owns it
then it's a sale type lease and you
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recognize gain immediately. If on, if
it's not that than maybe it's most of the
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risks and rewards. That's when you meet
both of the criteria of the present value
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and collectability. If you met both then
it's a sale type, I'm sorry a direct
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financing type. You're also going to
take the asset off your books and the
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gain will be amortized over the lease
life. If you miss both of those, so you
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don't have a OWNES for the lessee and one
or both of the PC are missing then it's a
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operating lease for the lessor. They
carry the asset and they depreciate their
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asset and they report rental income. So
on the balance sheet they're still
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carrying the asset and they're
depreciating it. Notice on the income
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statement, rental income and they
depreciate that asset that they're still
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carrying. If it's a sale type, cash goes
up, lease receivables starts going up,
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goes up immediately, and then it's paid
down. The fixed asset, get rid of it and
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you have the, what I call the residual
asset. In our lecture I call that the
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potential hunk of junk. You'll notice
gain will be right away, if there's a
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loss that would be reported, and then of
course you'll show interest income. Note
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if it's a direct financing, cash goes up,
the receivable starts up and then of
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course is paid down, you take the fixed
asset off your books and you'll show the
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hunk of junk. Notice here the gain will
be amortized over the life of the actual
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lease and of course you'll also have
interest income that gets reported there.
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So ultimately you combine those two but
it ultimately shows up as part of the
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income that you're going to earn. Net
effect is both of these will have the
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same amount of net income but one will
have a gain and then some interest
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income. This one will have interest
income for a larger amount over the
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entire period simply because we have the
gain built in there. So those are the
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fundamentals of how this works.
Hopefully that helps you understand and
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you're now ready to work a problem.
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