Leases Accounting For Lessor Notes

Leases Accounting by Lessor

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In this lesson we will study the accounting by lessor and the Pension plan treatment in financial reporting

Definition

A leasing agreement is an agreement whereby one party, the lessee, pays lease rentals to another party, the lessor in order to gain the use of an asset over a period of time.

Pension Liabilities are the future liabilities resulting from pension commitments made by a corporation

In other words

A lease guarantees the lessee use of an asset and guarantees the lessor regular payments from the lessee for a specified period.

A pension plan consists of a pool of assets and a liability for pensions owed to employees. Pension plan assets normally consist of investments, cash and (sometimes) properties. The return earned on the assets is used to pay pensions.

Why is it important?

Leasing offers a number of important advantages:

• Leasing increases purchasing power

• Leasing balances usage and cost

• Leasing provides fixed rate financing

• Leasing is convenient

• Leasing is tax-advantaged

• Leasing provides flexible payments

Pension Plans are important for the company to retain employees for long period of time and also it is a statutory requirement.

Lecture Notes

There are two types of lease:

• finance lease

• operating lease.

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee.

A finance lease (as its name suggests) is basically a way of financing the use of an asset (by spreading the payment over the life of the asset instead of paying the full amount all at once).

An operating lease is any lease other than a finance lease

An operating lease is similar to a rental agreement. The entity normally rents the asset for only part of its useful life.

See the earlier notes for guidance on classifications

Accounting by lessors

Finance leases

Here, the lessee, not the lessor, has control of the asset.

1. The lessor recognises the lease as a debtor. The carrying amount is the lessor’s net investment in the lease.

2. The net investment in a lease can also be defined as:

– the present value of the minimum lease payments receivable; plus

– the present value of any unguaranteed residual value accruing to the lessor (e.g. the residual value of the leased asset when it is repossessed at the end of the lease).

3. In practice, the lessor’s net investment in the lease is the same as the lessee’s lease liability.

4. The lease receipts are split between finance income and a repayment of the principal. The finance income is calculated using a constant periodic rate of interest.

Operating leases

If a lessor has an operating lease, it continues to recognise the leased asset.

1. Assets held under operating leases are recognised in the balance sheet as fixed assets. They should be presented according to the nature of the asset and depreciated in the normal way.

2. Rental income from operating leases is recognised in the profit and loss account on a straightline basis over the term of the lease, unless another systematic and rational basis is more appropriate.

3. Any difference between amounts charged and...

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