Accounting for Finance Lease by Lessee

Running head: ACCOUNTING AND FINANCIAL REPORTING
Accounting and financial reporting
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1ACCOUNTING AND FINANCIAL REPORTING
Accounting for finance lease by lessee
Lease is the contract that summarizes the terms as per which one party is
agreed to rent the property owned by any other party. It allows the lessee to use the
asset and further guarantees the lessor that is the owner of property with regular
payments for particular years or months from the lessee. It is legal obligation through
which the lessor permits the lessee to use the asset for the specified time period. At
the lease inception the lessee evaluates the conditions attached with the right-to-use
the assets and related liabilities (Aasb.gov.au, 2018). Evaluation are made on the
basis of the followings –
Right-to-use asset – initial amount associated with the lease liability apart from lease
payments payable to the lessor before lease inception in addition to the initial
expenses of direct costs, if any, shall be reduced by the amount received as lease
incentives.
Lease liability – lease payment’s present value are discounted with appropriate
discounting rate for the purpose of lease. Appropriate rate is implicit rate of lease if
the discounting rate is readily determined. However, where the rate is not
determinable lessee may use incremental rate for borrowing (Joubert, Garvie &
Parle, 2017).
In accordance with AASB 16, Para 61 lessor must differentiate leases as
operating lease or finance lease. Lease is treated as finance lease where
substantially all the rewards and risks linked with the asset are transferred. Further,
under finance lease the lessee shall recognize – (1) on-going amortization for right-
to-use for the asset (ii) right-to-use of the asset’s impairment (iii) ongoing
amortization for interest on the lease liability and (iv) variable payment in association

2ACCOUNTING AND FINANCIAL REPORTING
for lease that are not accounted for lease liability. For any contract that includes
lease element and 1 or more supplementary non-lease or lease component the
lessee must apportion the consideration of the contract to each of the lease
component based on the comparative stand-alone price of lease elewment and
aggregate stand alone component of non-lease component (Aasb.gov.au, 2018).
Lease payments for the subjected asset includes – (i) residual value of
guarantee, if any, provided as the guarantee by lessee to lessor (ii) fixed payment
including fixed payments in-substance reduced by the the amount of lease
incentives, if any (iii) exercise price for purchase option if certainty is there that
option will be exercised (iv) variable lease payments based on the index or rate and
it is computed by the initial index or rate at commencement date and (v) penalty paid
for lease termination. However, modification of lease shall be considered as
separate lease if modification enhances scope of lease through adding right-to-use 1
or more subjected assets and lease consideration enhanced through proportional
with stand alone price for increase in scope (Wong, Wong & Jeter, 2016).
Under various financial statements such as balance sheet, income statement
and cash flow statement lease are recorded by lessee as below –
Balance sheet – payable lease amount and lease asset shall be reported under
balance sheet and lease amount payable shall be reported as the liability. Value
recorded in balance sheet is lower between the fair market value of the leased asset
and present value of the future lease payments.
Income statement – interest expenses associated with the lease is reported under
the income statement as expenses. Amount of interest is calculated on lease amount
payable at the beginning through the implied interest rate for lease. In general, the