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Unlike lessees, lessors continue to distinguish between finance and operating leases.
1.
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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.
a) The lessor removes the underlying asset from the balance sheet.
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).
Income Recognition:
Finance income is recognized over the lease term using a pattern that reflects a constant periodic rate of return on the net investment.
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Operating Lease (Lessor)
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 are not transferred, the asset remains on the lessor’s balance sheet.
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This ensures that the receipt properly records the cash collection against the previously recognized lease receivable.
2. Finance Lease (Lessor)
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the underlying asset.
a) The lessor removes the underlying asset from the balance sheet- Create Fixed asset sale document.
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, CREATE oiTHER OPERATING INCOME. rECORD IT WITH TRANSACTION TYPE AS oTHERS.
Dr Lease Receivable
Cr Interest Income
When cash is received from the lessee: Create Other Cash/ Bank document with transaction type others and in paument details tab add the lease receivable GL
Dr Cash
Cr Lease Receivable
The lessor recognizes a receivable equal to the net investment in the lease (present value of lease payments plus any unguaranteed residual value).
Finance income is recognized over the lease term using a pattern that reflects a constant periodic rate of return on the net investment.
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