Despite recent disagreement between the IASB’s IFRS and FASB’s US-GAAP, on the lease accounting topic, lease transaction has became a popular way for companies to finance long-lived assets, for years. It offers two main advantages: firstly it typically provides a hundred percent financing, secondly it often results in off-the-books obligation. A lease transaction (agreement) involves at least two parties; a lessee and lessor, and an asset that is to be leased.

While a lessee is the party who is granted (by the lessor) a right to use the leased asset for a specified period of time in return for periodic rent payments, a lessor is the party that either owns or commits to purchase the asset, agrees to grant the lessee the right to use.

But, in this post, I am going to discuss the lessee’s side only as a start. Lease accounting is a wide and complex topic that unless one learns it one at a time, she won’t get the meat. The lease transaction derives its accounting complexity from the number of alternatives available to the parties involved. Leases can be used to transfer ownership of the leased asset, and they can be used to transfer the risks and rewards of ownership. In any event, the substance of the transaction dictates, with certain exceptions, the accounting treatment, irrespective of its legal form. Also, leases can be structured to allow differing assignments of income tax benefits associated with the leased asset to meet the objectives of the transacting parties.