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A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the underlying asset.
Derecognition:
a) The lessor removes the underlying asset from the balance sheet.Crates
At lease commencement:
Derecognize the asset from the balance sheet.
Recognize a lease receivable (net investment in the lease).
Dr Lease Receivable (PV of lease payments + unguaranteed residual value)
Cr Asset (carrying amount of leased asset)
Cr Gain on Sale/Finance Lease (if any)
During the lease term:
Recognize interest income on the lease receivable using the effective interest method.
Dr Lease Receivable
Cr Interest Income
When cash is received from lessee:
Dr Cash
Cr Lease Receivable
Recognition of Net Investment:
The lessor recognizes a receivable equal to the net investment in the lease (present value of lease payments plus any unguaranteed residual value).
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2. Operating Lease (Lessor)
A lease is classified as an operating lease if it does not transfer substantially all An operating lease (as a lessor) is simply a rental arrangement. The lessor allows someone else to use the asset for a period of time, but ownership does not change. Since the risks and rewards of ownership .Asset Retention:
The underlying are not transferred, the asset remains on the lessor’s balance sheet.
Depreciation:
The asset continues to be depreciated in accordance with applicable standards.
Income Recognition:
Lease income is recognized on a straight-line basis Because the lessor still owns the asset, it continues to depreciate just like any other asset they use in their business. The lease payments received are treated as rental income and are usually recognized evenly over the lease term (unless another systematic basis is more representative).straight-line basis)
a) When Lease Payment is Received (or Receivable)