22420 Chap.8 Lease Accounting for Lessees and Lessors
Lease Accounting for Lessees and Lessors
The lessee capitalises
AASB 16 treats a lease as a contract conveying the right to use an identified asset for a period in exchange for consideration.
Because the lessee controls that right, it recognises a right-of-use asset and a lease liability at the present value of payments not yet made, discounted at the implicit rate, then depreciates the asset and charges interest on the liability.
The lessor classifies
A lessor decides whether each lease is a finance or an operating lease.
In a finance lease it replaces the asset with a receivable measured as the discounted lease payments, guaranteed residual included, plus the present value of any unguaranteed residual.
Why it took twenty years
Revisions to the lease standard were proposed for two decades before agreement, because bringing leases onto the balance sheet raises reported liabilities and can push companies toward covenant limits.
The lessee side carried the controversy; lessor accounting changed little.
What this chapter covers
- 01
Definition of a lease and the right to use
- 02
Substance over form: control rather than ownership
- 03
Measuring the lease liability at the implicit rate
- 04
Payments in arrears versus in advance
- 05
Leaving out maintenance and insurance amounts
- 06
Interest and depreciation over the lease term
- 07
Lessor net investment and residual values
- 08
Initial direct costs by type of lessor
Worked example · free
Building a lessor’s receivable from rentals and residual values
- 1Rentals: $80,000 × 2.577097 = $206,168.
- 1Guaranteed residual: $20,000 × 0.793832 = $15,877, so lease payments are worth $222,045.
- 1Unguaranteed residual: $10,000 × 0.793832 = $7,938, giving a net investment of $229,983.
- 1Year 1: interest revenue $229,983 × 8% = $18,399; the $80,000 receipt reduces the receivable by $61,601 to $168,382.
Key terms
- Right-of-use asset
- A lessee’s asset representing its right to use an underlying asset for the lease term.
- Lease liability
- The present value of lease payments not yet made, discounted at the rate implicit in the lease.
- Net investment in the lease
- A lessor’s receivable: the present value of lease payments plus any unguaranteed residual value.
- Unguaranteed residual value
- The part of the expected residual value that the lessee does not guarantee.
- Initial direct costs
- Incremental costs of negotiating and arranging a lease, such as commissions and legal fees.
- Executory costs
- Amounts for services such as maintenance and insurance included in a payment but excluded from the lease liability.
Lease Accounting for Lessees and Lessors FAQ
Why must lessees recognise most leases now?
Because the lessee controls a right to use the asset, which meets the asset definition, and the obligation to pay meets the liability definition. Treating leased and owned assets consistently leads to capitalisation, whatever the legal title.
Over what period is the right-of-use asset depreciated?
Over the lease term when the asset goes back to the lessor at the end, as in the self-study solution; the depreciable amount is the asset’s cost when no residual guarantee is expected to be paid.
How are a lessor’s initial direct costs treated?
A financier includes them in the lease receivable, a manufacturer or dealer expenses them when it recognises its selling profit, and for an operating lease they are added to the asset and expensed over the lease term.
What gives a customer the right to use an asset?
Two things together: the right to obtain substantially all the economic benefits from using an identified asset, directly or by subleasing, and the right to direct its use, judged by who decides how and for what purpose it is used, how it operates and who operates it.
Are maintenance and insurance amounts part of the lease liability?
No. Amounts included in a payment to cover services such as maintenance and insurance are not lease payments. They are recorded as prepaid costs and expensed as used, and only the remaining payment is discounted into the liability.
Exam move
Draw a payment timeline before every lease question, mark arrears or advance, and count the payments to discount. Rebuild a full lessee schedule to nil and a lessor receivable with both residual types, and write the year 1 entries for each side. Then repeat the lessee calculation with payments in advance and compare the two liabilities.
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