Lease Standard Education Series for Nonprofits – Copier Lease Example
Over the course of this lease education series, we have laid the foundation, learning the intricacies of the standard. Next, let us build on what we have learned by applying the standard to a few common lease examples that many nonprofits experience – copier and building leases. In this blog, we take a closer look at a basic copier lease example.
Copier Lease Example Facts
To illustrate the difference in accounting, the analysis that follows treats the below copier lease example as an operating and financing lease relationship. In reality, an organization would need more information to properly evaluate the lease’s classification.
ABC Nonprofit (Lessee) and XYZ Company (Lessor) entered into a lease on January 1, 2022. The terms of the lease and other facts important to the lease accounting are as follows:
- The underlying asset is a copier and XYZ Company makes the copier available for use on January 1, 2022.
- ABC Nonprofit has the right to use the copier for a noncancelable term of 3 years. There are no extensions, purchase, or termination options.
- The useful life of the copier is more than 3 years.
- The lease payments are as follows: 2022 – $1,000; 2023 – $1,500; 2024 – $2,000
- If ABC Nonprofit prints more than 5,000 pages in any year of the lease, they are charged an additional $1,000 in that year. ABC Nonprofit did exceed the 5,000 printed page limit only in the 2nd year of the lease.
- ABC Nonprofit could not determine the implicit rate in the lease, however, its incremental borrowing rate on January 1, 2022 is 8.29%.
- ABC Nonprofit paid no initial direct costs when entering into the lease.
- XYZ Company did not pay a lease incentive to ABC Nonprofit for entering into the lease.
Initial Accounting
To begin, ABC Nonprofit needs to record the initial right of use (ROU) asset and lease liability. Based upon the facts above, the present value of the annual lease payments not yet paid, or the lease liability, is $3,777. This can be easily calculated using a free online calculator, in Excel, or a software like T-Value.
Next, ABC Nonprofit needs to calculate the initial ROU asset. Below is the formula to use, however, based upon the facts above, it just so happens to be that the initial ROU asset is the same as the initial lease liability of $3,777.
Regardless of the lease classification, the initial journal entry for ABC Nonprofit is the same. On January 1, 2022, ABC Nonprofit would record the following entry:
Subsequent Accounting
To illustrate the subsequent accounting for both lease classifications, the below tables were created based upon the initial facts above:
Based upon the initial facts, the below journal entries are what is needed as ABC Nonprofit proceeds through the life of the lease under each lease relationship:
**Note: ABC Nonprofit is required to make an additional lease payment of $1,000 in year 2023 because they exceeded the 5,000-printing limit.
A couple observations to point out:
- Regardless of the lease relationship, ABC Nonprofit’s lease liability is the same over the life of the lease.
- When comparing the accounting methods, expenses are front loaded in a financing lease verses an operating lease because of how the accretion (interest) of the lease liability is accounted for. Under a financing relationship, accretion is treated as interest expense, whereas, under an operating relationship, accretion is part of the lease expense. This can be seen in the table below:
How CLA Can Help?
The new lease standard is here. Be proactive to understand its impact on your nonprofit. CLA has the lease resources to help assess its impacts beyond general accounting and financial reporting, and walk you through readiness assessment, software selection and analysis, and implementation.
A turnkey lease accounting option can include:
- Assistance to identify and analyze leases that are subject to the standard
- Delivery of leased asset schedules, journal entries, and comprehensive footnote disclosures
- Updated and revised information at future interim or annual periods based on your needs
Lease Education Series
Stay tuned! In our next post we are taking a dive deeper into this new standard, looking at our second example – a building lease with no change in lease classification.
In case you missed or would like to recall upon any prior content, below is a running list of the educational series:
Lease Identification and Lease Term
Practical Expedients and Policy Elections
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