0Lease Definition
Lease is defined as a contract that conveys to the customer (‘lessee’) the right to use an asset for a stipulated period of time in exchange for consideration.
Disclosure required
All leases be reported in Balance sheet except ones with low value (eg: <$5000) or short term leases (eg: lease term
LESSEE side accounting and disclosure
- Single accounting model for all leases (except low value and short term leases)
- No segregation into operating leases and finance leases.
- All leases to be reported as finance leases.
- Recognise right of use assets and lease liabilities in Balance Sheet.
- Right of use asset measured mostly using cost model* (in few cases exceptions exist).
- Lease liability initially measured as PV of lease payments payable over lease term at a discount rate which can be either implicit in the lease agreement or can be lessee’s incremental borrowing rate.
- Erstwhile Operating Lease expenses now to be charged to Depreciation and Interest.
- Depreciation to be charged on Capitalised asset and Interest expense on lease liabilities.
LESSOR side accounting and disclosure
- Classify leases as either operating or financing leases.
- In case of finance lease all risks and rewards related to ownership of the underlying asset are transferred substantially to the lessee. Else a lease is classified as an operating lease.
- On lease commencement, lessor recognises assets held under finance lease as a receivable at an amount equal to the net investment in the lease.
- Finance income recognised over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of return on the net investment.
- Operating lease payments recognised as income on straight-line basis (or another systematic basis.)
Appendix
*Cost model ~ Cost less accumulated depreciation and accumulated impairment.
* Examples of situations that can normally lead to a lease being classified as a finance lease are:
- ownership of asset is transferred to the lessee at the end of the lease term;
- lease contains a bargain purchase option to buy equipment at less than fair market value;
- lease term covers major part of the economic life of the asset;
- at the inception of lease, present value of minimum lease payments equals substantially the fair value of leased asset.
- leased assets are of a specialised nature such that only the lessee can use them without major modifications being made.
