Financial Accounting and Reporting

assets for the future tax consequences of events that have been recognized in the financial
statements or tax returns.
Key deferred income tax terms → bladzijde 981.
Chapter 21 – Accounting for Leases
A lease is a contractual agreement between a lessor and a lessee. This arrangement gives the
lessee the right to use specific property, owned by the lessor, for an agreed period of time. In
return for the use of the property, the lessee makes rental payments over the lease term to the
lessor. Who are the lessors that own this property? They generally fall into one of three
categories:
1. Banks → Banks are the largest players in the leasing business. They have low-cost funds, which
give them advantage of being able to purchase assets at less cost than their competitors.
2. Captive leasing companies → Captive leasing companies are subsidiaries whose primary
business is to perform leasing operations for the parent company.
3. Independents
The growth in leasing indicates that it often has some genuine advantages over owning property,
such as:
1. 100% financing at fixed rates → Lease payments often remain fixed, which protects the lessee
against inflation and increases in the cost of money.
2. Protection against obsolescence
3. Flexibility → Lease agreements may contain less restrictive provisions than other debt
agreements. Innovative lessors can tailor a lease agreement to the lessee’s special needs.
4. Less costly financing → Some companies find leasing cheaper than other forms of financing.
5. Tax advantages
6. Off-balance-sheet financing
The various views on capitalization of leases are as follows:
1. Do not capitalize any leased assets
2. Capitalize leases that are similar to instalment purchases → This view holds that companies
should report transactions in accordance with their economic substance.
3. Capitalize all long-term leases
4. Capitalize non-cancellable leases where the penalty for non-performance is substantial.
Non-cancellable means that Air France can cancel the lease contract only upon the outcome of
some remote contingency, or that the cancellation provisions and penalties of the contract are so
costly to Air France that cancellation probably will not occur.
A lease is classified as a finance lease if it transfers substantially all the risks and rewards
incidental to ownership. In order to record a lease as a finance lease, the lease must be noncancellable.
Air France classifies and accounts for leases that do not meet any of the four criteria
as operating lease (Illustration 21-3).
If the lease transfers ownership of the asset to the lessee, it is a finance lease.
A bargain-purchase option allows the lessee to purchase the leased property for a price that is
significantly lower than the property’s expected fair value at the date the option becomes
exercisable.
If the lease period is for a major part of the asset’s economic life, the lessor transfers most of the
risks and rewards of ownership to the lessee. The lease term is generally considered to be the
fixed, non-cancellable term of the lease. However, a bargain-renewal option, if provided in the
lease agreement, can extend this period. A bargain-renewal option allows the lessee to renew the
lease for a rental that is lower than the expected fair rental at the date the option becomes
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