1. 1 Learning Objectives After studying the material in this chapter you will be able to do the following: LO1 Explain what liabilities are and how they are valued. LO2 Describe the nature and type of current liabilities and how they are accounted for. LO3 Recognize the characteristics of bonds, mortgages and other forms of long-term debt. Determine the value of bonds and understand how they are accounted for. Calculate mortgage payments and the amount of interest and principal paid each period. LO4 Explain the fundamentals of leasing and how leases are accounted for and reported in the financial statements. Copyright © 2013 McGraw-Hill Ryerson Limited

2. 2 Leases Method of financing use of an asset Contractual obligation for lessee to pay lessor Some leases may be considered “off-balance- sheet-financing” Copyright © 2013 McGraw-Hill Ryerson Limited LO4

3. 3 Leases Advantages include Do not have to obtain separate financing Financing is for 100% of asset cost Provides flexibility and protection from obsolescence Borrow assets when needed so no idle time Copyright © 2013 McGraw-Hill Ryerson Limited LO4

4. 4 Leases Two types of leases ▫Operating lease ▫Capital/finance lease Different accounting depending on type of lease Copyright © 2013 McGraw-Hill Ryerson Limited LO4

5. 5 Determining Type of Lease Capital lease if any of the criteria are met: ▫Likely that title passes to lessee at end of lease ▫Most economic benefit used during lease ▫Present value of lease payments equals most of fair value of asset IFRS application of greater judgment ASPE has quantitative guidelines Copyright © 2013 McGraw-Hill Ryerson Limited LO4

6. 6 Classification of Lease Whether a lease is classified as capital or operating affects many numbers Total assets and liabilities higher with capital lease Differences can affect many ratios Copyright © 2013 McGraw-Hill Ryerson Limited LO4

7. 7 Operating Lease Risks and rewards of ownership are not transferred - lessor retains full ownership Lease expense is recorded each period Lessee has off-balance sheet financing Obligation disclosed in notes Copyright © 2013 McGraw-Hill Ryerson Limited LO4

8. 8 Capital Lease Treat as if lessee purchased asset ▫Capitalize leased asset at PV of lease payments ▫Lease liability is also PV of lease payments Record reduction in lease obligation each period Record interest expense each period Record amortization expense each period Copyright © 2013 McGraw-Hill Ryerson Limited LO4

9. 9 Leases Copyright © 2013 McGraw-Hill Ryerson Limited LO4