LEASE Definiton of lease: The accounting standard on leases is PAS 17.
Under PAS 17, paragraph 4, a lease is defined as an
agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.
Otherwise stated, a lease is an agreement between one party
called the lessor and another party called the lessee whereby the lessee is granted the right use the property owned by the lessor for a specific period of time in consideration for certain payment in the form of rent.
Accountants recognize two kinds of lease namely operating
lease and finance or capital lease. Operating lease- Lessee PAS 17, paragraph 33, provides that lease payments under an operating lease shall be recognize as an expense on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the users benefit.
In other words, the periodic rental is simply recognized as rent
expense on the part of the lessee. The operating lease is also called the rental approach.
A lease bonus paid by the lessee to the lessor in addition to
the periodic rental is treated as prepaid rent expense by lessee to be amortized over the lease term. Leasehold improvement made by the lessee shall be depreciated over the life of the improvement or lease term, whichever is shorter.
The residual value of the leasehold improvement is
ignored by the lessee in computing depreciation because legally the leasehold improvement becomes the property of the lessor upon the expiration of the lease term.
Any security deposit refundable upon the lease
expiration is accounted for as an asset by the lessee. Operating lease- Lessor PAS 17, paragraph 50, provides that lease income from operating lease shall be recognized on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.
Otherwise stated, the periodic rental received by
the lessor in an operating lease is simply recognized as rent income.
A lessor shall present an asset subject to operating
lease in its statement of financial position according to the nature of the asset. The leased property remains as an asset of the lessor and consequently, the lessor bears all ownership or executor costs such as depreciation of leased property, real property taxes, insurance and maintenance.
However, the lessor may pass on to the lessee
the payment for taxes, insurance and maintenance cost.
The depreciation policy for depreciable leased
asset shall be consistent with the lessors normal depreciation for similar asset. Initial direct costs are often incurred by the lessor and include amounts such as commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging a lease.
Initial direct costs incurred by lessor in an operating lease
shall be added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income.
Any security refundable upon the lease expiration shall be
accounted for as liability by the lessor.
Any lease bonus received by the lessor from the lessee is
recognized as unearned rent income to the amortized over the lease term. Illustration-Lessee 1. On January 1, 2012, Easy Company leased an equipment from another entity for P300,000 annually for 3 years. Rent expense 300,000 Cash 300,000 2. On January 1, 2012, Easy Company made a security deposit of P300,000 refundable upon the lease expiration. Rent deposit 300,000 Cash 300,000 3. In addition to the annual rental, Easy Company paid P60,000 to the lessor as a lease bonus on January 1, 2012. Prepaid rent 60,000 Cash 60,000 4. The lease bonus is amortized over 3 years or P20,000 annually. Rent expense 20,000 Prepaid rent 20,000 Illustration-Lessor
1. On January 1, 2012, Simple Company purchased a
machinery for P3,000,000 cash for the purpose of leasing it. The machine is expected to have a 10-year life and no residual value. Machinery 3,000,000 Cash 3,000,000 2. On April 1, 2012, Simple Company leased the machine to another entity for 3 years at a monthly rental of P50,000, payable at the beginning of every month. Cash (50,000x9) 450,000 Rent income 450,000 3. On April 1, 2012, Simple Company received a security deposit of P600,000 to be refunded upon the lease expiration. Cash 600,000 Liability for rent deposit 600,000 4. In addition to the rental, Simple Company received from the lessee a lease bonus of P120,000 on January 1, 2012. Cash 120,000 Unearned rent income 120,000 5. On April 1, 2012, Simple Company paid initial direct costs of P300,000. Such costs are directly attributable to negotiating and arranging the operating lease. Deferred initial direct costs 300,000 Cash 300,000 6. During the year, Simple Company paid repair and maintenance of P 20,000. Repair and maintenance 20,000 Cash 20,000 7. The lease bonus is amortized over 3 years or P40,000 annually. Unearned rent income 30,000 Rent income (40,000x9/12) 30,000 8. The machinery is depreciated over 10 years or P300,000 annually. Depreciation 300,000 Accumulated depreciation 300,000
Note that the depreciation id from the date of acquisition,
January 1, 2012 and not from April 1, 2012, date of lease. The reason is that the machinery is acquired for leasing purposes and therefore available for its intended use, meaning for rental from January 1, 2012. Idle property is subject to depreciation as long as it is available for its intended use. 9. The initial direct costs are recognized as expense over the lease term. Amortization of initial direct costs 75,000 Deferred initial direct costs 75,000 (300,000/3x9/12)
The balance of the deferred initial direct costs
shall be presented as an addition to the carrying amount of machinery. Unequal rental payments PAS 17, paragraph 33, provides that lease payments under an operating lease shall be recognized as an expense on a straight line basis over the lease term unless another systematic basis is representative of the time pattern of the users benefits.
This simply means that where the operating
lease requires unequal cash payments, the total cash payments for the lease term shall be amortized uniformly on the straight line basis as rent expense or rent income. Illustration Aye Company leased office space to Bee Company for a three year period beginning January 1, 2012. Under the terms of the operating lease, rent for the first year is P 1,000,000 and rent for the next two years, P1,250,000 annually. However, as an inducement to enter the lease, Aye granted BEE the first six months of the lease rent- free.
The total rental for the lease term is determined as
2012 (1,000,000x6/12) follows: 500,000 2013 1,250,000 2014 1,250,000 Total rental for 3 years 3,000,000 Average annual rental 1,000,000 (3,000,000/3) Books Aye Company- Lessor
balance on December 31, 2014 and the recorded rent income each year is P 1,000,000. Books of Bee Company- Lessee
2012 Rent Expense 1,000,000
Cash 500,000 Rent Payable 500,000
2013 Rent expense 1,000,000
Rent Payable 250,000 Cash 1,250,000
2014 Rent expense 1,000,000
Rent Payable 250,000 Cash 1,250,000
Disclosures for operating lease- Lessee
1. The total of future minimum lease payments under
noncancelable operating leases for each of the following period:
a. Not later than one year
b. Later than one year and not later than 5 years c. Later than 5 years
2. The total of the future minimum lease payments expected to
be received under noncancelable subleases at the end of the reporting period.
3. Lease and sublease payments recognized as expense in the
period, with separate amounts for minimum, lease payments, contingent rents and sublease payments.
4. A general description of the lessees significant leasing
arrangements. Disclosure for operating leases Lessor 1. Future minimum lease payments under noncancelable operating leases in the aggregate and for each of the following periods:
a. Not later than one year
b. Later than one year and not later than 5 years c. Later than 5 years
2. Contingent rents recognized as income in the
period.
3. A general description of the lessors leasing
arrangements Thank you for THE END. . . watchin g!