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Accounting for Leases: How to Calculate ROU and Lease Liability. CPA Exam FAR

In this video, I discuss what is included in the computation of right of use asset ROU and lease liability as covered on the CPA exam FAR. Start your free trial: https://farhatlectures.com/ The "commencement date" of a lease is when the lessor makes the asset available for the lessee's use, marking the start of the lease. The lease duration extends through the period where the lessee has a legally enforceable right to use the asset, ending when this noncancelable period concludes. If a lease can be ended by either party with minimal penalties, it's not considered enforceable. When it comes to termination options, the lease term must consider various scenarios: If the lessee has the option to extend the lease and is likely to do so, this extension period is included in the lease term. If the lessee has the option to terminate the lease but is unlikely to do so, the lease term includes this period. If the option to either extend or terminate the lease lies with the lessor, these periods are also included in the lease term. Lessees are required to record right-of-use (ROU) assets and liabilities for leases that aren't short-term. A lease is deemed short-term if it lasts 12 months or less without a likely-to-be-exercised option to buy the asset. These short-term leases are treated as operating leases, with payments recognized evenly over the lease term. When calculating lease payments, lessees need to consider several components to determine the total amount they will be responsible for during the lease term. These components include: Required Fixed Payments: This includes all fixed payments outlined in the lease agreement, minus any incentives provided to the lessee. It also covers variable payments that are essentially fixed in nature, meaning they are predictable and unavoidable under the lease terms. Purchase Option Price: If the lessee has the option to buy the leased asset at the end of the lease term and it's highly likely they will exercise this option, the cost of this purchase option is included in the lease payments calculation. End-of-Lease Purchase Price: If the lease agreement gives the lessor the right to make the lessee buy the asset at the end of the lease, this purchase price is also factored into the lease payments. Variable Payments Based on Indexes or Rates: Lease payments can include costs that vary based on an index or rate (like interest rates or inflation). However, future lease payments aren't adjusted for predictions of how these indexes or rates might change. Instead, any payment changes due to index or rate fluctuations are recognized as expenses in the period they occur. Residual Value Guarantees: If the lessee guarantees a certain residual value for the leased asset (the expected value at the end of the lease term), this guaranteed amount is included in the lease payments calculation. However, any residual value not guaranteed by the lessee isn't considered. Termination Penalties: If there are penalties for early termination of the lease that the lessee is likely to incur (for instance, if exercising a termination option is likely), these penalties are included in the lease payments calculation. When calculating lease payments, lessees have some flexibility regarding certain costs, while other costs are explicitly excluded from the calculation: Optional Inclusions (Nonlease Components): Lessees can choose whether to include amounts allocated to nonlease components of a contract in their lease payments. Nonlease components refer to services or goods that are part of the lease contract but are separate from the right to use the underlying asset. Examples might include maintenance services for the leased asset or property taxes. The lessee has the discretion to either include these costs in the lease payments calculation or account for them separately. S #cpaexaminindia #cpaexam #accountinglectures