01 January 2013
1)What is the difference between operating lease and finance lease ? 2)How the accounting is done in the books of lessor and lessee in case of finance lease and operating lease ? 3)Thanks in advance .
01 January 2013
Finance lease is a lease agreement in which substantially all the risks and rewards incidental to ownership of an asset are transferred to the lessee from the lessor. Where lessee is the person who acquired an asset from lessor for use and lessor is the person who is the owner of the asset and has handed over the asset to lessee to earn rentals.
On the other hand operating lease is a lease agreement which is NOT a finance lease. In short, a lease agreement in which risks and rewards associated with the asset are not transferred to the lessee and stays with the owner of the asset i.e. lessor.
Even though the lessor is the rightful owner of the asset and most often owners are responsible to bear any loss and obtain economic benefits associated with the asset but sometimes the risks and rewards associated with the assets are transferred to another person by the owner himself without transferring the title of ownership of the asset. Same is the case with the finance lease.
Accounting treatment for operating leases The accounting treatment for an operating lease is straightforward for both the lessor and the lessee. The lessee has incurred an operating expense, so the lease rental payable is written off in the profit and loss account. The lessee has to disclose in the notes to the accounts the amount charged in the year and the amount of the payments to which the entity is committed at the year end.
The lessor has earned revenue from renting out the asset and accordingly recognises the lease rental receivable as income in the profit and loss account.
01 January 2013
Accounting treatment of finance leases - by the lessee When a lessee enters into a finance lease it is getting access to the risks and rewards of the asset and accordingly the lessee reflects substance by recognising the asset in its own accounts. This is consistent with the ASB’s Statement of Principles definition of and recognition criteria of an asset.
Accounting treatment of finance leases - by the lessor Such lessors are normally banks or similar lending institutions. When entering into a finance lease the lessor is in substance making a loan which will be repaid with interest. Despite having legal title to the asset subject to the lease, the lessor does not recognise this as an asset on its balance sheet, as it does not control the asset and does not have access to the future economic benefits. The lessor does however have the asset of a future income stream and accordingly recognises a debtor ‘net investment in finance leases’ .
02 January 2013
Superb explained .. 1)Please also explain me who will recognize asset in balance sheet in case of operating lease ? 2)lessor? or lessee ?
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