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Lessor Accounting

There are two types of leases: operating leases and finance leases. Operating leases transfer less risk to the lessee, while finance leases transfer most risks and rewards of ownership to the lessee. A sale and leaseback transaction involves selling an asset and then leasing it back, allowing the original owner to utilize the asset without owning it. Depending on the risks transferred, a sale and leaseback is either treated as a sale with the asset removed from the seller's balance sheet, or as financing with the asset remaining on the balance sheet.

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Maryam Zafar
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78 views

Lessor Accounting

There are two types of leases: operating leases and finance leases. Operating leases transfer less risk to the lessee, while finance leases transfer most risks and rewards of ownership to the lessee. A sale and leaseback transaction involves selling an asset and then leasing it back, allowing the original owner to utilize the asset without owning it. Depending on the risks transferred, a sale and leaseback is either treated as a sale with the asset removed from the seller's balance sheet, or as financing with the asset remaining on the balance sheet.

Uploaded by

Maryam Zafar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Lessor Accounting:

OPERATING LEASE FINANCE LEASE

Definition Rewards and risk concerning the Risk and reward of underlying asset
ownership of the asset remains with the is transferred substantially to the
leaser for the leased asset. lessee.

Ownership Remains with the leaser At the end of lease term, the asset is
transferred to the leasee

Purchase option For this, purchase option is not available Purchase option is available at less
for the lessee during that period than the FV of the asset if its
reasonably certain.

Lease Term This is extended to less than seventy five The lease term contains a larger
percent of predicted useful life of leased proportion of the economic life of
asset the asset leased

Specialized Nature No restriction The leased asset can only be used by


the lessee with no major
modifications. Thus, the assets
should have a specialized nature

Example Laptops, Computers and Projectors etc. Office Building, Machinery and
Plant etc.

Income Statement Asset rent is recognized as expense. This Interest expense of payable is
is same as the lease payment recognized in Income Statement. If
the asset is depreciable, then
depreciable expensed is also
recognized

Balance Sheet No asset and no liability is recognized in Both, asset and liability is reported.
Balance Sheet The recognized amount is lower
than the PV of the lease payments.

SALE & LEASEBACK:

This is defined as a financial transaction in which an individual leases an asset himself after
selling it to another party. Thus, this transaction allows to utilize an asset but do not own it. In
this regard, IFRS 15 is used to determine “Revenue from contracts with customers”.
RECOGNITION:

NOT A SALE: The asset is continued to be recognized by the lessee on its balance sheet.
Similarly, the amount received as financial liability in accordance to IFRS 9

FOR SALE: The lessee will recognize the right-of-use asset which will replace previously
held asset. Loss/Gain will be recognized accordingly. Similarly, lessor will purchase the asset
under the applicable rules of IFRS 16.

EXAMPLE:

Most classic example is “Bank’s safe deposit vault” in which banks are the initial owners.
The vaults are sold at market price value to any leasing company, which is higher than the
book value. On long-term basis, the leasing company will sell back the vaults to the same
Bank.

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