CPA Financial Accounting and Reporting (FAR)

Certified Public Accountant Financial Accounting and Reporting examination.

Conceptual Framework and Standard SettingFinancial Statements and DisclosuresRevenue Recognition
LeasesFinancial Instruments and Fair Value MeasurementBusiness Combinations and Consolidations
Analyzing Real-World Financial StatementsPreparing Adjusting and Closing EntriesApplying GAAP to New Business Transactions
Mastering Multiple-Choice QuestionsSimulations and Task-Based Testlets
Conceptual Framework...Financial Statements...Revenue RecognitionLeasesFinancial Instrument...Business Combination...Analyzing Real-World...Preparing Adjusting ...Applying GAAP to New...Mastering Multiple-C...Simulations and Task...
Advanced Topics

Leases

Accounting for Leases

Leasing is when one party (the lessee) uses an asset owned by another (the lessor) for a fee. New accounting standards (ASC 842) changed how leases are reported for greater transparency.

Types of Leases

  • Finance Lease: Treated like a purchase. The lessee records both an asset and a liability.
  • Operating Lease: The asset is used temporarily; both right-of-use asset and lease liability are recorded, but expenses are recognized differently.

Key Steps

  1. Calculate the present value of future lease payments.
  2. Record a right-of-use asset and a lease liability on the balance sheet.
  3. Recognize interest and amortization expenses (finance) or straight-line lease expense (operating).

Real-World Impact

Lease accounting affects key financial ratios and borrowing capacity. Transparent reporting helps investors spot off-balance-sheet financing.

Key Formula

\[PV = \frac{C}{(1 + r)^n}\]

Examples

  • A company leases office space for 5 years and records both a right-of-use asset and a lease liability.

  • A retailer enters a 10-year equipment lease, impacting its balance sheet and expense recognition.

In a Nutshell

Leases require recording both assets and liabilities, giving a clearer picture of a company's commitments.

Key Terms

Right-of-Use Asset
An asset that represents a lessee's right to use a leased asset over the lease term.
Lease Liability
A liability reflecting the present value of future lease payments.
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Financial Instruments and Fair Value Measurement
Leases - CPA Financial Accounting and Reporting (FAR) Content | Practice Hub