Statements of Financial Accounting Standards In Taiwan

Revised by the Financial Accounting Standards Committee In Taiwan on 23 November 2000

The purpose of this Statement is to establish the accounting standards for leases.

A lease can be classified as either a capital lease or an operating lease. And a lease contract involves at least two parties, the lessor and the lessee.

The classification of lease

capital lease

To be qualified as a capital lease for the lessee, a lease contract must satisfy any one of the following four criteria:

(a) the lease transfers ownership of the leased property to the lessee by the end of the lease term;

(b) the lease contains a bargain purchase option;

(c) the lease term is equal to 75% or more of the total estimated economic life of the leased property.  This criterion should not be applied to leases in which the leased property has been used for more than 75% of its estimated economic life before the lease begins.

(d) the present value of the rental payments plus the bargain purchase price or the guaranteed residual value is at least 90% of the market value (less any investment credits) of the leased property at the inception date of the lease. This criterion should not be applied to leases in which the leased property has been used for more than 75% of its estimated economic life before the lease begins.

To be qualified as a capital lease for the lessor, a lease contract must satisfy any one of the above four criteria plus both of the following criteria:

(a) collectibility of the lease payment receivables is reasonably assured; and

(b) no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease.

operating lease

A lease that can not be classified as a capital lease is an operating lease.

Accounting for capital leases - lessor

For the lessor, a capital lease can be divided into two types, direct financing lease and sales-type lease.

For direct financing lease, the lessor only recognizes interest revenue on the lease payment receivable.  The difference between the lease payment receivable and the cost (or carrying value) of the leased property is the unearned interest revenue. The lease payment receivable should be classified as either a current asset or long-term lease payment receivable, depending on the rent collection periods.  Unearned interest revenue should be treated as a contra account of the lease payment receivable. For a sales-type lease, the lessor recognizes the manufacturer or dealer’s profit or loss and interest revenue.

Accounting for capital leases - lessee

For capital lease, the lessee should capitalize the leased property as an asset and recognize the lease liability. The value of the leased property is the smaller of the following two values: (a) the present value of all future rental payments (less the lessee’s executory costs) plus the bargain purchase price or lessee’s guaranteed residual value, and (b) the leased property’s market value at the inception date of the lease. All leased property should be depreciated. If the lease contract contains a bargain purchase option or allows the transfer of ownership at the end of the term, then the depreciation should be determined based on the leased property’s useful economic life. The lease term is used otherwise. The lessee’s periodic rental payment is composed of two parts: (a) the return of the lease liability, and (b) the interest expense due to long-term or installment financing. The interest expense is determined using effective interest rate.

The gain or loss resulting from the sales-leaseback of leased property should be deferred using the unearned gain or loss on sales-leaseback account.  However, if the fair value of the leased property is smaller than its book value, then the lessee should recognize the difference between the fair value and the book value as a loss. The amortization of the unearned gain or loss on sales-leaseback should be charged to either the depreciation expense account or rent expense account, depending on the nature of the lease.

Accounting for operating leases - lessor

The lessor should establish a rent revenue account and/or a Guarantee deposit-in account for the collection and receipt of rental payments and lessee’s deposit. The accrued rent or uncollected rent should be adjusted using the unearned rent or rents receivable accounts. The lessor should calculate the imputed interest of lessee’s deposit using a bank’s long-term interest rate and recognize both the rent revenue and interest expense.

Accounting for operating leases - lessee

For an operating lease, lessee should expense the periodic rent at the time when it is paid. All accrued or unexpired rent should be adjusted at the end of the lessee’s accounting period. If contracted with a guarantee deposit, the lessor should calculate the imputed interest of deposit-out using a bank’s long-term interest rate and recognize both the rent expense and interest revenue.

This statement also specifies disclosures about lease and the accounting standards for termination and modification of lease contract for lessee and lessor.

This statement becomes effective for financial statements for the fiscal year ending on and after 31 December 2000.

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