Posted by geemiz | Posted in Practical Accounting 1, Theory of Accounts | Posted on 12-03-2011
Tags: Leases
Lease
A lease is an agreement between two parties, the lessor and the lessee. The lessee is given the right to use a certain property that is owned by the lessor for a specific period of time. In return the lessee will pay an amount to the lessor called rent.
Two Kinds of Lease
Operating Lease
- This is the most Popular rental approach
- The periodic rental is recognized as rent expense on the part of the lessee and rent income on the part of the lessor.
Finance Lease
- This is actually a lease purchase.
- This is a lease that transfers substantially all the risks and rewards incident to ownership of an asset.
- Title may or may not be transferred.
Parties of Operating Lease
Operating Lease โ Lessee
- Rental is recognized as an expense.
- Lease bonus (payment in addition to periodic rental) is treated as a prepaid rent expense and is to be amortized over the lease term.
- Any leasehold improvements shall be depreciated over the life of the improvement or lease term (the period of the lease) whichever is SHORTER.
- Its security deposit is treated as an asset.
Operating Lease โ Lessor
- Rental is recognized as rent income.
- The property remains the asset of the lessor, meaning that he bears all the ownership of the property and all its executor cost such as taxes, insurance and maintenance cost.
- Any security deposit refundable upon the expiration of the lease shall be accounted for as a liability.
- Lease bonus received is recognized as unearned rent income and to be amortized over the lease term.
Accounting for Depreciation of Leased Asset
Depreciation of any asset acquired for the purpose of leasing the asset is from the date of acquisition, because idle property is subject to depreciation as long as it is available for its intended use.
Unequal Rental Payment
PAS 17 provides that โlease payments, under operating lease shall be recognized is a straight line basis over the lease term unless another systematic basis is representative of the time pattern of the users benefit.โ
If unequal cash payments are required, the total cash payment for the lease term shall be amortized uniformly on the straight line basis as rent expense or rent income.
Finance lease – there is a bargain purchase option; PV of minimum lease payments is greater than or equal to 90% of the FV of the lease; lease term is greater than or equal to 75% of the useful life of the leases asset. ๐
Hi
The topic about finance lease will be discuss further on the article about “Accounting for Finance Lease”.
Still thank you for the inputs.. ๐
what is the main idea of using PAS 17 in recording lease payments? Thanks
The main idea of using PAS 17 (IAS 17 โ Accounting for leases) is to have an appropriate accounting policies to be used with regard to finance and operating lease.
MAY I ASK, WHAT IS LEASE BONUS FOR? IS IT REQUIRED IN THE LEASE CONTRACT? DO THE LESSEE HAVE TO PAY FOR IT? THANK YOU:)
Not necessarily lease bonus is required but there are some parties included lease bonus as part of their contract and the lessee must pay for it.
Hi,
I have here one contract of lease here. But the total area of the leased premises is divided into 3 phases. Those phases is accounted for as follows:
Yr 1 Phase 1 – Jan-Jun (unit price)
Yr 1 Phase 2(P1+P2) – Jun-Oct (unit price lower than P1)
Yr 1 Phase 3(P2+P3) – Oct-Dec (unit price lower than P2)
Yr 2 – Jan-Dec (unit price escalate 5%)
Yr 3 – Jan Dec (unit price escalate 5%)
My question is, should I recognize rent on straight line basis for the total contract cost as a whole of the above or should I recognize rent on straight line basis per phases on total of lease term as well?
TIA
How about the treatment of non refundable security deposit?