I have discussed about definition and classification of lease and lease in the financial statement of lessee. In this post I discuss about lease in the financial statements of lessor. Read on…

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Finance Lease In The Financial Statement Of Lessor

Lessors shall recognize assets held under finance leases as a receivable equal to the net investment in the lease. The net investment in the lease is the aggregate of the minimum lease payments and any unguaranteed residual value (the “gross investment”) discounted at the rate implicit in the lease.

Due to the definition of the interest rate implicit in the lease—that rate which discounts the lease payments to the fair value of the asset plus the initial direct costs of the lessor—the initial direct costs of the lessor are automatically included in the receivable. The direct costs of the lessor are those costs directly attributable to negotiating and arranging a lease.

Subsequent to initial recognition, finance income is recognized based on a pattern reflecting a constant rate of return on the net investment in the lease. Receipts under the finance lease are apportioned to the gross investment, as a reduction in the debtor, and to the finance income element.

Lessors who are manufacturers or dealers should recognize profit on the transaction in the same way as for normal sales of the entity. Thus a finance lease will create a profit or loss from the sale of the asset at normal selling prices and a finance income over the lease term. If artificially low rates of interest are quoted, profit is calculated using market interest rates.

 

Disclosures for Finance Lease In The Financial Statement Of Lessor

In addition to the requirements of the financial instruments standards, these disclosures are required:

A reconciliation between the gross carrying amount of the investment in the lease and the present value of the future minimum lease payments receivable

  • The gross investment in the lease and the future minimum lease payments for each of the following:
  • Not later than one year
  • Later than one year but not later than five years
  • Later than five years
  • Unearned finance income
  • Unguaranteed residual value
  • Doubtful recoverable lease payments
  • Contingent rents recognized as income
  • A general description of the significant leasing arrangements

 

Operating Lease In The Financial Statement Of Lessor

Lessors shall show assets subject to operating leases in the financial statement in accordance with the nature of the asset—motor vehicles, plant and equipment, and so on.

Lease income from operating leases shall be recognized in the income statement on a straight-line basis over the lease term unless another basis reflects better the nature of the benefit received. As mentioned earlier, any incentives should be considered. Depreciation on the asset subject to a lease is recognized as an expense and should be determined in the same manner as similar assets of the lessor. Additionally, the lessor should apply the principles of IAS 16, 36, and 38 as appropriate.

Initial direct costs of negotiating and arranging the lease shall be added to the cost of the asset and expensed over the lease term in the same pattern as the income is recognized.

 

Disclosures for Operating Lease In The Financial Statement Of Lessor

In addition to the requirements of the financial instruments standards, these disclosures are required:

  • The future minimum lease payments under noncancelable operating leases for each of the following:
  • Not later than one year
  • Later than one year but not later than five years
  • Later than five years
  • Contingent rents recognized as income
  • A general description of the significant leasing arrangements