Accounting for Leases

Vocabulary flashcards related to accounting for leases, covering key terms and definitions from the lecture notes.

Lease

A contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property, owned by the lessor, for a specified period of time.

Finance Lease

A lease that transfers control (or ownership) of the underlying asset to a lessee; the lessee takes ownership or consumes the substantial portion of the underlying asset over the lease term.

Operating Lease

All leases that do not meet any of the finance lease tests.

Lease Term

Generally considered to be the fixed, non-cancelable term of the lease; bargain-renewal options can extend this period.

Implicit Interest Rate

The rate, at commencement of the lease, that causes the aggregate present value of the lease payments and unguaranteed residual value to be equal to the fair value of the leased asset.

Incremental Borrowing Rate

The rate a company uses when it is impracticable to determine the implicit rate of a lease.

Sales-Type Lease

A lease where the lessor recognizes a profit immediately, similar to the sale of an asset.

Direct Financing Lease

A lease where the profit is deferred and recognized over the life of the lease.

Unguaranteed Residual Value

A portion of the asset's residual value for which recovery is not assured to the lessor; the lessor recognizes sales revenue and cost of goods sold only for the portion of the asset for which recovery is assured.

Guaranteed Residual Value

The residual value of the asset is guaranteed by the lessee.

Executory Costs

Normal expenses associated with owning a leased asset, such as property insurance and property taxes.

Initial Direct Costs

Incremental costs of a lease that would not have been incurred had the lease not been executed.

Bargain Purchase Option

Allows the lessee to purchase the leased property for a future price that is substantially lower than the asset’s expected future fair value.

Short-Term Lease

A lease that, at the commencement date, has a lease term of 12 months or less.