Lessors and Direct Financing Capital Leases
When a financing firm enters into a direct financing capital lease, the lessor reduces PPE shown on its balance sheet and creates an investment in lease asset; the total value of assets on the lessor’s balance sheet is unchanged.
NOTE: Local accounting regulations may vary in treatment of these cash flows for a direct financing capital lease.
- Over the life of the direct financing capital lease, the lessor receives a payment from the lessee. A portion of the payment is classified as interest income on the income statement and the remaining portion of the payment is used to reduce the investment in lease asset on the balance sheet.
- Unlike the cash flows described in the sales-type lease above, the statement of cash flows are not impacted at the time the lease is entered for a direct financing lease.
- When the regular payments are made by the lessee towards the direct finance lease, the lessor reports the interest income as an operating cash flow and the investment in lease asset pay down as an investing cash inflow.
- Recognition and Measurement of Bonds
- Bond Amortization, Interest Expense, and Interest Payments
- Derecognition of Debt
- Role of Debt Covenants
- Presentation and Disclosures Related to Debt
- Leasing Vs. Purchasing Assets
- Capital Leases and Operating Leases
- Lessee Accounting
- Effects of Leases on Selected Financial Reporting Items for Lessees
- Lessor Accounting for Leases
- Lessors and Sales-Type Capital Leases
- Lessors and Direct Financing Capital Leases
- Effect of Leases on Financial Statements for Lessors
- Disclosures for Capital and Operating Lease
- Defined Benefits Plans vs. Defined Contribution Plans
- Pension Expense (both GAAP & IFRS) for the Income Statement
- Defined Benefit Plans & the Company Balance Sheet