The accounting for leases is described in section 3065 of the CICA Handbook. Section 3065 deals with two types of leases: operating leases and capital leases.
Is it a Capital or an Operating Lease?
If one of the following conditions is met, the lease would be considered to be a capital lease:
- the terms of the lease provide for the transfer of the asset to the lessee by the end of the lease, or there is a purchase option to purchase the asset at less than the expected fair value
- the term of the lease covers at least 75% of the expected life of the asset
- the minimum payments (discounted at the lower of the lessee’s incremental rate of borrowing or the rate implicit in the lease) are at least 90% of the asset’s fair value at the inception of the lease (3065.04-.13)
Accounting for a Capital Lease
The asset would be capitalized at the lower of the present value of the minimum lease payments and the fair value of the asset. The discount rate used in establishing the present value would be the lower of the lessee’s incremental rate of borrowing and the rate implicit in the lease.
At the inception of the lease, the amount equivalent to the capitalized value of the asset would be set up as the obligation for future lease payments. The obligation would be adjusted for payments made and any interest accrued. When the obligation is settled, the lease obligation would be removed from the statement of financial position (3065.15,.16,.19)
The lease obligation would be shown separately and any current portion would be part of current liabilities (3065.22,.23)
Accounting for an Operating Lease
Generally, lease payments under an operating lease should be expensed on a straight line basis, except where the period of the benefit of the lease called for some more appropriate basis of expensing the lease costs. (3065.30)
The minimum lease payments for each of the next five years, the total future minimum lease payments, and any other commitments under the lease would have to be disclosed in the notes. (3065.37)
The cost, accumulated amortization, and method used of the leased of property must be disclosed. (3065.73)
For a capital lease of property, plant and equipment: the interest rate, interest expense, maturity date, and amount outstanding must be disclosed, and the aggregate amount of payments in each of the next five years. (3065.74 - .76)
For an operating lease, the future minimum payment for the next five years must be disclosed, unless the obligation is only one year or less. (3065.77)