Topic: Lease Accounting

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Table of Contents
Lease Accounting.......................................................................................................................................... 1
Scope ............................................................................................................................................................. 1
Types of Lease .............................................................................................................................................. 1
Characteristics of an Accounting Lease ........................................................................................................ 1
Transfer of asset not possession ................................................................................................................ 1
Subject of lessee........................................................................................................................................ 1
All consumable assets cannot be leased .................................................................................................... 2
Lessor borne all the liabilities of possession ............................................................................................. 2
Period of lease ............................................................................................................................................... 2
Precise intention of Lease ............................................................................................................................. 2
Responsibility of Lessee ............................................................................................................................... 2
Rental Fixation .............................................................................................................................................. 2
IASB & FASB Standard for Accounting Lease............................................................................................ 3
References ..................................................................................................................................................... 4

Lease Accounting
Lease is defined as a process by which a company or individual pay payments which are on
contractual basis. These payments are periodic and are inclusive of tax. In return, the firm or
individual utilize particular non-current assets. The contract of lease is settled among two parties;
lessee and lessor. Under a lease contract, a party who uses fixed assets and pays a certain series
of payments is lessee while the other party who receives the payments and the owner of asset is
lessor. This relationship between the two parties is called a tenancy.

Scope
The companies which have not applied standard of Accounting guidance for SMEs, those
organizations apply a lease accounting standard which is regulated. This is based on the
regulation of listed companies financial statements to which Financial Instruments and
Exchange Law is applied upon, should be topic to the standard of existing lease accounting.

Types of Lease
There are two types of leases; Operating lease and financial lease. Operating lease is a contract
between a lessee and lessor to use a particular asset for a limited period of time fixed among both
parties but the ownership rights remains with lessor.
Financial leases are defined as the leases which transfers the assets ownership to lessee at the
the end of lease period noted that the asset has a specialized nature and lessee can utilize it
without any main modification. In financial leases, lessee can cancel the lease agreement plus the
losses incurred by lessor are paid by lessee as well.

Characteristics of an Accounting Lease

The characteristics of an accounting lease are explained below:

Transfer of asset not possession

A lessor agrees for a pre fixed time to transfer certain assets to lessee.

Subject of lessee
It should be worthy, measurable and identified.

All consumable assets cannot be leased

The asset which is being leased by lessor remains in sellers ownership and only transfer of asset to lessee
takes place. Thus, possessions which cannot be utilized without consuming cannot be leased to lessee.
This includes money, wheat, fruits etc.

Lessor borne all the liabilities of possession

Any leased asset is in the ownership of lessor. If any loss or damage to the asset occurs or if any liability
of the asset exists during the leased period, it shall be paid by lessor.

Period of lease
The time period of lease must be stated in contract clearly
Any asset which is leased out should be fully known by both parties (lessee and lessor). This is very
necessary to validate a lease.

Precise intention of Lease

When lessee uses a leased asset then this asset cannot be used for other purposes which are not specified
in the lease contract. But if the purpose is not precisely mentioned in the lease agreement then lessee can
use it for other purposes as well.

Responsibility of Lessee

It is the responsibility of lessee to pay compensation to lessor if he has caused any harm or damage
or misused the leased asset.

Lessor has the ownership of the leased asset. If any loss or damage caused by the aspects beyond the
control of the lessee, it shall be borne by lessor as the risk of the leased asset remains throughout the
lease period on lessor.

Rental Fixation

The rent payments must be known at the time of agreement for the entire period of lease.
It is allowed that diverse rentals are fixed for different stages throughout the lease period,
provided that the payment of rent for each period is exclusively decided upon at the time of
beginning a lease. The lease is not applicable if the rental for a following stage of the lease period
has not been decided or has been missing at the selection of the lessor.

Generally in financial leases, the fixation of rental on the foundation of the cumulative rate of
leased asset borne by the lessor if lessor and lessee agree to it, provided that all other
circumstances of an official lease are fully met.
The lessor cannot raise the rent without the consent of lessee and any contract to this act is
nullified.
A security deposit may be owed in advance before the release of the asset to the lessee and this
amount gathered by the lessor shall remain with him as 'on account' amount and shall be attuned
towards the rent after its being due.
The lease period is effective from a particular date when the leased asset is transferred to lessee
If the leased asset totally loses the purpose of lease, the agreement will be ended.

Under standard conditions, owner of property has autonomy to do what they want with their
property. This also includes handing over the property to the lessee (tenant) or damaging their
own property. However, if the owner has given ownership to another lessee then any obstruction
with the property by the lessee in lawful ownership is unlawful.
Alike rules apply to private property and commercial property, though the terms would be
dissimilar. A possession of property which exceeds one year must be in script in order to assure
the Statute of Frauds.

IASB & FASB Standard for Accounting Lease

FASB (Financial Accounting Standards Board) & the IASB (International Accounting Standards Board)
started a project on joint basis to make a different approach to lease accounting. This would consists
leases that involves assets and liabilities to be documented in the financial statements Although many of
the issues are linked with prevailing lease requirements that is related to the accounting of operating
leases in lessees financial statements, retentive the current lease accounting models available for lessors
would be varying with the projected approach to lessee accounting. This would result in additional
difficulty in financial reporting. In addition, the standard boards concluded that it would be useful to
consider accounting of lessor at the same time-period as they are engaged to develop proposals on
revenue generation.

References

Leasing.or.jp, (2014) [online] Available at:

https://www.leasing.or.jp/english/studies/outline.html [Accessed 30 Nov. 2014].
Accaglobal.com, A. (2014). Lease - operating or finance | ACCA Qualification | Students
| ACCA | ACCA Global. [online] Accaglobal.com. Available at:
http://www.accaglobal.com/pk/en/student/acca-qual-student-journey/qual-resource/accaqualification/f7/technical-articles/lease.html [Accessed 1 Dec. 2014].
Fasb.org, (2014). Leasing. [online] Available at:
http://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1351027207574 [Accessed 1 Dec.
2014].
Small Business - Chron.com, (2014). Types of Leasing Agreements. [online] Available
at: http://smallbusiness.chron.com/types-leasing-agreements-41898.html [Accessed 1
Dec. 2014].
Fasb.org, (2014). Proposed Accounting Standards UpdateLeases (Topic 842). [online]
Available at:
http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176162613656&acce
ptedDisclaimer=true [Accessed 1 Dec. 2014].