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    Lessor Operating Lease

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    Christine Altamarino
    A lessor must classify a lease as either an operating lease or a finance lease. An operating lease does not substantially transfer the risks and rewards of ownership to the lessee. A finance lease transfers ownership to the lessee or meets other criteria including the lease term covering most of the asset's life. For an operating lease, the lessor recognizes rental income over the lease term and initial direct costs as an expense. Security deposits are liabilities and lease bonuses are amortized as unearned income. The asset remains on the lessor's books.

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    Lessor Operating Lease

    Uploaded by

    Christine Altamarino
    109 views2 pages
    A lessor must classify a lease as either an operating lease or a finance lease. An operating lease does not substantially transfer the risks and rewards of ownership to the lessee. A finance lease transfers ownership to the lessee or meets other criteria including the lease term covering most of the asset's life. For an operating lease, the lessor recognizes rental income over the lease term and initial direct costs as an expense. Security deposits are liabilities and lease bonuses are amortized as unearned income. The asset remains on the lessor's books.

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    Lessor Operating Lease (1)

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    A lessor must classify a lease as either an operating lease or a finance lease. An operating lease does not substantially transfer the risks and rewards of ownership to the lessee. A finance lease transfers ownership to the lessee or meets other criteria including the lease term covering most of the asset's life. For an operating lease, the lessor recognizes rental income over the lease term and initial direct costs as an expense. Security deposits are liabilities and lease bonuses are amortized as unearned income. The asset remains on the lessor's books.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    109 views2 pages

    Lessor Operating Lease

    Uploaded by

    Christine Altamarino
    A lessor must classify a lease as either an operating lease or a finance lease. An operating lease does not substantially transfer the risks and rewards of ownership to the lessee. A finance lease transfers ownership to the lessee or meets other criteria including the lease term covering most of the asset's life. For an operating lease, the lessor recognizes rental income over the lease term and initial direct costs as an expense. Security deposits are liabilities and lease bonuses are amortized as unearned income. The asset remains on the lessor's books.

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    © All Rights Reserved
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    of 2

    LESSOR ACCOUNTING

    A lessor shall classify either:


     Operating lease
     does not transfer substantially all the risks and rewards incidental to ownership of an
    underlying asset
     Finance lease
     Any of the following situation:
     The lease transfers ownership of the underlying asset to the lessee at the end
    of the lease term.
     The lessee has an option to purchase the asset at a price which is expected to
    be sufficiently lower than the fair value at the date the options becomes
    exercisable. ( option to purchase must be reasonably exercisable at the
    inception of the lease)
     The lease term is for the major part of the economic life of the underlying asset
    even if the title is not transferred.
     USA GAAP major part means at least 75 % of the economic
    life of
    an asset.
     The present value of the lease payments amounts to substantially all of the
    fair value of the underlying asset at the inception of the lease.
     USA GAAP substantially all means at least 90 % of the fair value of
    the leased asset.
     Other criteria:
     The underlying asset is of such specialized nature that only the lessee can use
    it without major modification.
     If the lessee can cancel the lease, the lessor’s losses associated with the
    cancelation borne by the lessee.
     Gains or losses from the fluctuation in the fair value of the residual accrue to
    the lessee.
     The lessee has the ability to continue the lease for a secondary period at a
    rent that is substantially lower than market rate.

    OPERATING LEASE-LESSOR
     Periodic rental received
     recognized as rent income
     Initial direct cost
     Added to the carrying amount of the underlying asset and recognized as an
    expense over the lease term on the same basis as the lease income.
     Security deposit refundable upon the lease expiration shall be accounted for as
    liability
    by the lessor.
     Lease bonus received by the lessor from the lessee is recognized as unearned rent

    income to be amortized over the lease term.


     The underlying asset remains as an asset of the lessor. The lessor bears all ownership or
    executory cost.

     Unequal rental payments


     The total cash payments for the lease term shall be amortized uniformly on the
    straight line basis as rent income over the lease term.

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