Lease 2nd Session
Lease 2nd Session
Lease 2nd Session
Associate Professor
Dept. of Accounting and Information Systems
University of Rajshahi
01777018158
saifuddink@ru.ac.bd
A lease is a contractual
agreement between a lessor and
a lessee. This arrangement gives
the lessee the right to use
specific property, which is
owned by the lessor, for a
specified period of time. In
return for the use of the
property, the lessee makes
rental payments over the lease
term to the lessor.
Advantages of Leasing—Lessees
• From the perspective of the lessee, leasing can
provide significant advantages, such as the following:
1. 100% financing at fixed rates.
2. Protection against obsolescence.
3. Flexibility.
4. Less costly financing.
A Look at the Lessor
• Who are the lessors that own the property
being leased? They generally fall into
one of three categories:
1. Banks.
2. Captive leasing companies.
3. Independents
Advantages of Leasing—Lessors
Lessors find leasing attractive because:
1. It often provides profitable interest margins.
2. It can stimulate sales of a lessor’s product whether it be from
a dealer
(lessor) or a manufacturer (lessor).
3. It often provides tax benefits to various parties in the lease,
which enhances the return to all the parties involved, including
the lessor.
4. It can provide a high residual value to the lessor upon the
return of the property at the end of the lease term.
Measurement of the Lease Liability and Lease Asset
Measurement of the lease liability is based on the lease term, lease payments, and
discount rate.
• Lease Term
The lease term is generally considered to be the fixed, non-cancelable term of the
lease. Some leases include a bargain renewal option, which gives the lessee an
option to renew the lease for a rental that is lower than the expected fair rental at
the time the option becomes exercisable
• Lease Payments
The lease payments generally include the following:
1. Fixed payments. These are the rental payments that are specified in the lease
agreement and fixed over the lease term.
2. Variable payments that are based on an index or a rate.
3. Amounts guaranteed by a lessee under a residual value guarantee.
4. Payments related to purchase or termination options that the lessee is
reasonably certain to exercise.
• Discount Rate
To determine the lease liability, a lessee should compute the present value of the
lease payments using the implicit interest rate.
Lessee Accounting: Example 1
To illustrate the accounting for a lease using the finance lease method, assume
that CNH Capital (NLD) (a subsidiary of CNH Global) and Ivanhoe Mines
Ltd. (CAN) sign a lease agreement dated January 1, 2022, that calls for CNH to
lease a backhoe to Ivanhoe beginning January 1, 2022. The terms and provisions
of the lease agreement and other pertinent data are as follows.
The term of the lease is five years. The lease agreement is non-cancelable,
requiring equal rental payments of €20,711.11 at the beginning of each year
(annuity-due basis).
The backhoe has a fair value at the commencement of the lease of €100,000,
an estimated economic life of five years, and a guaranteed residual value of
€5,000. (Ivanhoe expects that it is probable that the expected residual value
at the end of the lease will be greater than the guaranteed amount of €5,000.)
The lease contains no renewal options. The backhoe reverts to CNH Capital at
the termination of the lease.
Ivanhoe’s incremental borrowing rate is 5 percent per year.
Ivanhoe depreciates its equipment on a straight-line basis.
CNH sets the annual rental rate to earn a rate of return of 4 percent per year;
Ivanhoe is aware of this rate.
• Requirements (Lessee accounts)
1. Calculate the initial carrying amount of the lease liability
and the right-of-use asset.
2. Provide the journal entries to be recorded in the books of
Ivanhoe Mines’s of the financial transaction.
3. Prepare an amortization schedule for the lessee for the
lease term.
4. Prepare the necessary journal entries in the books of
accounts of Ivanhoe Mines for the periods of 2022 to
2026.
5. What figures will be shown in the financial position for
the years ended December 31st, 2022, and 2023 for the
lease assets and liabilities?
Short-term leases and low value assets