Operating lease accounting
/How to Account for an Operating Lease
The accounting for an operating lease assumes that the lessor owns the leased asset, and the lessee has obtained the use of the underlying asset only for a fixed period of time. Based on this ownership and usage pattern, we describe the accounting treatment of an operating lease by the lessee and lessor.
Operating Lease Accounting by Lessee
The lessee should recognize the following over the term of the lease:
A lease cost in each period, where the total cost of the lease is allocated over the lease term on a straight-line basis. This can be altered if there is another systematic and rational basis of allocation that more closely follows the benefit usage pattern to be derived from the underlying asset.
Any variable lease payments that are not included in the lease liability
Any impairment of the right-of-use asset
Related AccountingTools Course
At any point in the life of an operating lease, the remaining cost of the lease is considered to be the total lease payments, plus all initial direct costs associated with the lease, minus the lease cost already recognized in previous periods. After the commencement date, the lessee measures the lease liability at the present value of the lease payments that have not yet been made, using the same discount rate that was established at the commencement date.
After the commencement date, the lessee measures the right-of-use asset at the amount of the lease liability, adjusted for the following items:
Any impairment of the asset
Prepaid or accrued lease payments
Any remaining balance of lease incentives received
Any unamortized initial direct costs
Operating Lease Accounting by Lessor
At the commencement date of an operating lease, the lessor shall defer all initial direct costs. In addition, the lessor must account for the following items subsequent to the commencement date of the lease:
Lease payments. Lease payments are recognized in profit or loss over the term of the lease on a straight-line basis, unless another systematic and rational basis more clearly represents the benefit that the lessee is deriving from the underlying asset. Profits cannot be recognized at the beginning of an operating lease, since control of the underlying asset has not been transferred to the lessee.
Variable lease payments. If there are any variable lease payments, record them in profit or loss in the same reporting period as the events that triggered the payments.
Initial direct costs. Recognize initial direct costs as an expense over the term of the lease, using the same recognition basis that was used for the recognition of lease income.
If the collectability of the lease payments and payments related to a residual value guarantee are not probable as of the commencement date, the lessor limits the recognition of lease income to the lesser of the payments described in the immediately preceding sub-sections or the actual lease payments (including variable lease payments) that have been received. If this assessment later changes, any difference between the income that should have been recognized and which had been recognized is recognized in the current period.
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