Question

Explain the difference in lessee income statement and balance sheet presentation for a finance versus an operating lease.

Answer 1

In lease the lessor and lessee enter into an agreement for the use of an asset for payment, subject to specified period of time. Lease are of two types namely operating and financial or capital lease. They both differ in the way of ownership. The accounting treatment for both types differ due to this fact.

In case of financial lease the lessee where the lease to be recorded on the asset side and a liability as well. Lease is recorded at the fair value calculated according to the IRR. The payments made are divided into installments just like that of loan including interest and principal. Again lessee will charge depreciation also for the asset. The rate of depreciation will depend on the end life ownership transfer. Where useful life is kept in view so that depreciation can be calculated accordingly.

In case of operating lease the lessee will not show any asset in his balance sheet. The cost incurred on lease payments will be recorded in income statement following straight line method except cost of services such as insurance, etc. In case some other basis is decided upon for recording payments then it should be used.