How to working with Leases? from a life process Watch Video

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✓ Published: 26-Apr-2024

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Working with leases involves several steps, whether you're a lessor (the owner of the asset being leased out) or a lessee (the party leasing the asset). Here's a general guide:<br/><br/>For Lessors:<br/><br/>Identify Lease Arrangements: Determine which contracts in your business involve leases. A lease is defined as a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration.<br/>Classify Leases: Classify each lease as either a finance lease or an operating lease. This classification depends on factors such as whether the lease transfers ownership of the asset to the lessee by the end of the lease term, whether the lease term is for a major part of the asset's economic life, and whether the present value of the lease payments equals or exceeds substantially all of the fair value of the asset.<br/>Recognize Lease Income: For operating leases, lessors recognize lease income over the lease term, typically on a straight-line basis unless another systematic basis is more representative of the pattern of benefits to be derived from the leased asset.<br/>Accounting for Finance Leases: If a lease is classified as a finance lease, the lessor recognizes a lease receivable representing its right to receive lease payments, and the underlying asset is derecognized from the lessor's balance sheet. The lessor recognizes interest income over the lease term and any residual asset or residual value.<br/>Disclosure: Disclose relevant information about lease arrangements in the financial statements, including the nature and timing of lease payments and any significant leasing arrangements.<br/>For Lessees:<br/><br/>Identify Lease Arrangements: Determine which contracts in your business involve leases, similar to lessors.<br/>Classify Leases: Classify each lease as either a finance lease or an operating lease. This classification follows similar criteria as for lessors.<br/>Recognize Lease Liability and Right-of-Use Asset: For finance leases, lessees recognize a lease liability representing their obligation to make lease payments and a right-of-use asset representing their right to use the leased asset.<br/>Accounting for Operating Leases: For operating leases, lessees recognize lease payments as lease expense on a straight-line basis over the lease term unless another systematic basis is more representative of the pattern in which the lessee consumes the benefit derived from the leased asset.<br/>Disclosures: Disclose relevant information about lease arrangements in the financial statements, including the nature and timing of lease payments, significant leasing arrangements, and the maturity analysis of lease liabilities.<br/>Throughout the process, it's important to adhere to relevant accounting standards, such as the International Financial Reporting Standards (IFRS 16) or the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842, depending on the jurisdiction and regulatory requirements. Additionally, it's advisable to con