Question

assuming that the above lease does not transfer substantially all the risks and rewards incidental to ownership of the leased asset, explain the accounting treatment for lease in the book of both companies.

Answer 1

As the lease does not transfer substantially all the risks and rewards

incidental to ownership of the leased asset, the lease is an operating

lease.

The principles to be applied in the financial statements are:

By lessee:

*The lease payments should be recognized in the financial statements

as an expense over the lease term. It should be on a straight line basis,

unless any other method is appropriate in representing the pattern of

the benefits derived by the user.

*Incentives should be recognized as a reduction in the lease expense

over the term of the lease.

By lessor:

*The lease income should be recognized in the financial statements

over the lease term on a on a straight line basis, unless any other

method is appropriate in representing the pattern in which the use

benefit is diminished.

*The leased asset should be represented in the balance sheet

according the nature of the asset.

*Incentives should be accounted as a reduction of lease income over

the lease term.

*Manufacturers or dealer lessors should recognize the profit or loss in

same period as if it were an outright sale.

Disclosure requirements for lessor:

*Amount of minimum lease payments should be classified in aggregate

as follows and disclosed in the balance sheet:

--the next year

--years 2 through 5

--above 5 years

*Also general description of significant leasing arrangements.