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Leasing

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11 views13 pages

Leasing

Uploaded by

hassanali3181
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Leasing

Financial Accounting

BAF-2A
What is leasing?
• "A contract, or part of a contract, that conveys
the right to use an identified asset for a period
of time in exchange for consideration.“

• The contract is between Lesee and Lessor

• The Lessor is the owner of the property and the


Lessee is the tenant who occupies the property and
pays rental payments.

• The Lessee must have right to direct the use of


the asset and the right to obtain all the economic
benefits from its use, during lease period.
Types of leasing (Accounting
Basis)
• Operating Lease:
• No transfer of ownership or substantial risk/rewards
to the lessee.
• Asset remains on lessor’s balance sheet.
• Lessee records lease payments as expense over the
lease period.

• Finance Lease:
• Asset (risk/reward) is transferred to lessee.
• Lessee records the leased asset on its balance sheet
as an asset and a corresponding liability.
• Long-term agreement with little or no residual value
for the lessor at the end of lease period.
Types of leasing (Legal
Ownership Basis)
• Lease-purchase:
• The lease agreement combines elements of lease and
purchase.
• Lessee has the option to buy the leased asset at the end
of lease period.

• Sale and Lease back:


• Owner sells the asset to a lessor and then leases it
back.
• Allows the original owner to free up capital while
retaining use of asset.

• Leveraged Lease:
• A third party (usually a lender) finances the portion of
Types of leasing (Asset Type
Basis)
• Real Estate Lease:
• For property and buildings.
• Commercial, Residential and Industrial buildings and
property.

• Equipment Lease:
• For equipment, machinery and tools.
• Manufacturing, agriculture and IT.

• Vehicle Lease:
• For cars, trucks and other vehicles.
• Options are available for purchase or trade-in at the end
of lease terms.
Types of leasing (Payment
Structure)
• Fixed Lease:
• Fixed amount of money (payment) are to be made
throughout the lease period.

• Variable Lease:
• Payment amounts vary based on specific factors, such
as “usage” or “market conditions”.
IFRS 16
• IFRS 16 is the International Financial Reporting Standard for leases,
issued by the International Accounting Standards Board (IASB). It
came into effect on January 1, 2019, replacing the previous standard,
IAS 17.
• Objective of IFRS 16: The main goal of IFRS 16 is to increase
transparency in lease accounting by requiring lessees to recognize
almost all leases on their balance sheets. This provides a more
accurate picture of a company's financial position and obligations.

• A lessee must recognize the right to use leased asset.


• A lessee must recognize the liability related to lease.
• This eliminates the distinction between operating and finance leases
for lessees under IAS 17. All leases are treated similarly to finance
leases.
• Leases are classified as finance leases or operating leases,
depending on the risks and rewards of ownership.
• Lessees are exempted to apply IFRS 16 for short-term leases (12
months or less) and for low-value assets (office equipment, laptop,
furniture etc.) For these exemptions, lease payments are expensed as
General Entries for Lessee
• At beginning (commencement) of lease

• When lease begins the Lessee recognizes “Right-of-Use”


and “Lease Liability” .

• G.J.E Right-to-use asset Dr


Lease liability Cr

The amount is equal to the present value of lease


payments to be made over lease period.
General Entries for Lessee
• Subsequent Entries (recording lease payments)

• Lease payments are allocated between “Principal Repayment” and


“Interest Expanse” .

• Principal Repayment = Reduces the lease liability


• Interest Expense = Recognized in Income Statement

• G.J.E Lease Liability Dr


Interest Exp Dr
Cash Cr

Interest Expense is calculated using the effective interest method


on lease liability.
General Entries for Lessee
• Depreciating the Right-of-Use Asset

• The ROU asset is depreciated over the shorter of “The


Lease Term” or “The Useful Life of Asset”.

• For recording depreciation


• G.J.E Depreciation Exp Dr
Accumulated Dep Cr
General Entries for Lessee
• Adjustments (for changes in lease agreement)

• If there is a change in lease terms, lease payments, or


discount rate, the lease liability and ROU asset are
remeasured.

• G.J.E ROU Asset Dr


Lease LiabilityCr
Example

• Suppose a lessee enters into a 3-year lease for


equipment with annual payments of $10,000 at a
discount rate of 5%. At the commencement, the
present value of lease payments is $27,232.

• Assume $1,361 is interest for Year 1:


General Journal Entries

Dr ($) Cr ($)
$
Right-to-Use Asset 27,232
Lease Liability $ 27,232

$
Lease Liability 8,639
$
Interest Exp 1,361
Cash $ 10,000

$
Depreciation Exp 9,077

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