Accounting for Financial Modeling

Operating Lease Accounting 2

 Example
Period Year 1 Year 2 Year 3 Year 4
Lease payments (at the beginning of each year) 8,600 2,000 2,100 2,200 2,300
Discount rate 1.00 1.10 1.21 1.33
Discounted lease payments (NPV) 7,455 2,000 1,909 1,818 1,728
1. Suppose that a company leased equipment for 4 Lease payments on IS IS 2,150 2,150 2,150 2,150
years;
Period Year 1 Year 2 Year 3 Year 4
Lease liability opening balance 5,455 6,001 4,291 2,300
2. Lease payment schedule is 2000 in year 1,
- cash lease payment - 2,100 2,200 2,300
which increases by 100 each subsequent year, the -
+ implied interest expense 546 390 209
lease is payable at the beginning of each year; Lease liability closing balance BS 6,001 4,291 2,300 -

3. The company’s borrowing rate is 10%; Period Year 1 Year 2 Year 3 Year 4
ROUA opening balance 7,455 5,851 4,091 2,150
4. Show lease payments on the income statement, - depreciation 1,604 1,760 1,941 2,150
lease liability and right of use asset on the ROUA closing balance BS 5,851 4,091 2,150 -
balance sheet. Lease payments on IS IS (2,150) (2,150) (2,150) (2,150)
Change in lease liability 6,001 (1,710) (1,991) (2,300)
Change in ROUA and cash (5,851) 1,760 1,941 2,150
Net change 150 50 (50) (150)
Cash lease payments CFS (2,000) (2,100) (2,200) (2,300)