A lease is an agreement between two parties for the right to use an asset for the payment over an agreed period. Two parties who come into the agreement are Lessee, who has a right to use an asset over the term of the agreement and Lessor who legally owns the asset and has no legal right to use an asset over the period of the lease.
Leasing assets is the common way of obtaining or using an asset without buying it outright. Leasing can be operating and financial. IAS17 Leases describe the accounting and disclosure of operating & financial leasing.
Characteristics of the lease will be
- Contract over the lease term
- Lessee given right to use the assets
- Specify periodic/lease payment & payment dates
- Specify whether legal obligation will pass to leasee at the end of the lease term.
Significant differences between finance and operating lease are listed below
|Operating Lease||Finance Lease|
|Is ownership expected to be transferred at the end of the lease term?· Bargains Price option?
|Ownership of the leased assets will not be transferred to lease at the end of the lease||Ownership of the leased assets will be transferred to lease at the end of the lease.Also, considering that leased asset should be transferred at the bargain Price.|
|Is the lease term a major part of the economic life of the leased asset?||If the lease term of the leased asset is for the major part of economic life , not then lease will be considered as an operating lease||If the lease term of the leased asset is for the major part of economic life then leased will be considered as finance leases.|
|Is the present value of the minimum lease payments substantially all of the fair value of the leased asset?||No, present value of the minimum lease payments will not substantially all of the fair value of the leased asset,||Yes, present value of the minimum lease payments will not substantially all of the fair value of the leased asset,|
|Is the lease non-cancellable or, if cancelled, will the costs be borne by the lessee?||No, Lessee will not accept the cost of the cancellation of the lease.||Yes, Lessee will accept the cost of the cancellation of the lease.|
|Any related arrangements such that substantially the entire risks and rewards incidental to transfer ownership to the lessee?||No, risks & Rewards will be incidental to the ownership & not transferred to the lessee.||Yes, risks & Rewards will be incidental to the ownership & transferred to the leasse.|
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