As per our last blog, now we know what are the types of leases and how to distinguish them.

Now, our next step will be explained and account for a finance lease & operating lease for both a lessee and a lessor.

Accounting for Finance Lease 

A Finance lease is one where all risk and reward incidental to ownership are transfer to the lessee.

Accounting for a finance lease is looked from three different perspectives

  • The Lessee: There are two elements to finance lease under the lessee i.e. assets and liability & initial direct costs of the lessee. We need to record asset or a liability at lower of the present value of the minimum lease payment (PVMLP) and the fair value of the asset at the start of the lease.

The asset needs to be depreciated over the shorter of the lease term & its useful life. Impairment of asset needs to be considered under IAS36 Impairment of Assets

Initial direct costs must be expensed under (IAS17 para.38)

  • The Lessor: As a lessor will be leased out an asset. Lessor will record sales and cost of sales with a resultant profit or loss at initial recognition

Sales/Cost of Sales will be lower of the fair value of the asset and PVMLP calculated market interest rate.

Initial direct costs must be expensed under (IAS17 para.38)

Accounting for Operating Lease

An Operating lease is one where risk and rewards incidental to the ownership and remained with the lessor.

Accounting for operating lease is straightforward.

  • The Lessee: Lease payment for lessee is treated as an operating expense. If payments are made in advance, then, expenses will be classified as prepaid expenses or prepayments.
  • The Lessor: Lease income will be recognized as sales for the business on a straight-line basis over the lease term. Any expense incurred for the asset will be treated as an operating expense.

Please do not hesitate to contact us on 9310 7871, If you have any question relating to accounting for operating or finance the lease or if you want us to manage your regular bookkeeping in profession & systematic way.