What is Lease Accounting?
Lease accounting is the process by which a company records the financial impacts of its leasing activities. Leases that meet specific classification requirements must be recorded on a company’s financial statements.
There are two lease classifications – operating and financing – that determine how your company should account for its leases in financial statements, depending on the length of the lease term.
1. Operating Leases
Operating Leases are leases that don’t present an opportunity for the lessee to gain ownership of an asset. Under the new accounting standards, operating leases must be reported on a company’s balance sheet only if the lease term is greater than 12 months. If the lease term is equal to or less than 12 months, the Financial Accounting Standards Board (FASB) doesn’t require their inclusion on the balance sheet.
For an operating lease with a term equal to or less than 12 months:
- The lessor reports the individual lease payments as income on the income and cash flow statements.
- The lessee reports the individual lease payments as operating expenses on the income and cash flow statements.
For an operating lease with a term of more than 12 months:
- The lessor reports the lease as an asset on the balance sheet and individual lease payments as income on the income and cash flow statements. They must also account for the asset’s depreciation over time.
- The lessee reports the lease as both an asset and a liability on the balance sheet and reports individual lease payments as expenses on the income and cash flow statements.
2. Financing Leases
Financing Leases, formerly called capital leases, are leases in which the lessee has reasonable expectation to gain ownership of an asset. Under the United States Generally Accepted Accounting Principles (US GAAP), there are five criteria, only one of which needs to be met for a lease to be considered a financing lease:
- The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
- The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
- The lease term is for the major part of the remaining economic life of the underlying asset unless the commencement date of the lease falls at or near the end of the economic life of the underlying asset.
- The present value of the sum of lease payments and any residual value guaranteed by the lessee (not already reflected in lease payments) equals or substantially exceeds all of the fair values of the underlying asset.
- The underlying asset is of such a specialized nature that it’s expected to have no alternative use to the lessor at the end of the lease term.
For financing leases, regardless of the term length:
- The lessor reports the lease as a leased asset on the balance sheet and individual lease payments as income on the income and cash flow statements.
- The lessee reports the lease as both an asset and a liability on the balance sheet due to their stake as a potetial owner of the asset and their required payment. They also report individual lease payments as expenses on the income and cash flow statements.
All-in-one IFRS 16 and ASC 842 lease accounting software
Board Lease Accounting enables companies to achieve IFRS 16 and ASC 842 compliance with ease, taking care of the entire process of data management, calculation, simulation, and reporting. Make light work of the production of accurate accounts for rented/leased property and equipment, remove non-compliant Excel spreadsheets, and automate time-consuming manual processes.
Get up-and-running, fast
Board Lease Accounting is a pre-built solution which integrates easily with existing data architectures, bringing all your data together to create one version of the truth
Achieve complete process and user control
Easily monitor IFRS 16 and ASC 842 processes via a user-friendly dashboard, ensure deadlines are met with an inbuilt alerting system, and define user capabilities and the segregation of duties through customizable user settings
Easily model different scenarios
Ensure you take the best possible decision by simulating the impact of different scenarios; all IFRS 16 and ASC 842 calculations are generated by the solution, with full currency conversion capabilities
And in more detail
- Application controls over processes
- Contract applicability according to IFRS 16 and ASC 842 checklists
- Contract data uploading from different sources
- Alerting data manager
- Fiscal period management
- Automatic journal calculation
- Posting to different ERP systems
- Currency conversion at transaction, local, or group level
- Creation and comparison of unlimited scenarios
- Different approaches available for journal calculation
- Unlimited possibility to create reports, dashboards, and charts
- User capabilities management
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