Accounting for Finance Leases by Lessees

Running head: CORPORATE ACCOUNTING
Corporate accounting
Name of the student
Name of the university
Student ID
Author note

Part A
Accounting for finance leases by lessees
Lease is the arrangement where one party that is the lessor offers an asset
for the purpose of use by other party that is the lessee against periodic payment.
Accounting for any lease is made based on the type of lease. Finance lease is the
approach through which the finance is provided effectively by the leasing entity who
buys the asset for the purpose of providing it on lease for the agreed time period.
Lessee makes the rental payment that is sufficient to cover the asset’s original cost
during the primary period of the lease (Aasb.gov.au 2019). An obligation is there for
making such payment which sometime also includes the balloon payment while the
contract is over. Once all these payments are made, lessor is expected to recover
the investment made by lessor in the asset. The lessee is committed for paying the
rentals over the specified period and technically finance lease is considered as non-
cancellable though it can be terminated before the completion of lease term. Finance
lease leads to recognition of both the assets as well as liabilities by the lessee it its
books at commencement of lease. Further, it shall be reported at the value that is
equal to the PV of the MLP (minimum lease payments). It is likely that lease assets
as well as lease liabilities are reported by lessee and the lessor at different values
(Aasb.gov.au 2019).
Parties to the lease may go for negotiation of the lease before the assets
under the subject is available for the purpose of use by the lessee. The subjected
asset in some of the scenario required to be redesigned or reconstructed to make it
ready for the use by the lessee. Based on the conditions and the terms of contract
the lessee may require making payments associated with the design or construction

of the asset. If lessee incurs the cost with regard to design or construction of
subjected asset the lessee shall take into consideration those costs through
application of other associated standards (Barone, Birt and Moya 2014)
At the inception the lessee is required to recognise the lease liability and a
right-to-use asset (RUA) and the same shall be valued at cost. Cost of the RUA is
comprised of – (i) direct cost expensed by lessee initially (ii) lease payments made at
commencement of lease reduced by lease incentives received, if any (iii) amount
measured as lease liability initially (iv) cost estimates that is to be expensed by
lessee for dismantling as well as removing subjected asset, restoring the asset to the
condition which it is purported to be and restoring site where it is located. Lessee
must recognise all these costs as the integral part of while it expensed any obligation
for these costs (Wong and Joshi 2015)
For the contract that includes lease element and one or more than one
additional lease or the non lease component the lessee is required to allocate
consideration associated with the contract to each of the lease component and
aggregate stand alone price for the lease component. As the practical expedient, the
lessee has the option to select through the class of the underlying asset not for the
non-lease component and associated n on-lease component, if any (Aasb.gov.au
2019).
After the inception date lessee is required to value the RUA through
application of cost approach – (a) adjusting for measurement of lease liability and (b)
after deducting the amount of accumulated depreciation and accumulated
depreciation, if any. The lessee is required to apply AASB 16 – Property, plant and
equipment for the purpose of charging depreciation on RUA. If the subjected asset’s

ownership is reassigned to lessee at the time when the lease period is completed or
if the cost of RUA reveals that the lessee will opt for the purchase option, the RUA
shall be depreciated since the commencement of the lease to the end of life of the
asset (Aasb.gov.au 2019). Otherwise, lessee is required to depreciate RUA from
inception of lease to completion of lease term or completion of the life of RUA,
whichever is earlier. Further, lessee is required to comply with AASB 136 –
Impairment of assets for determining whether the RUA is impaired and accounting
for acknowledged impairment loss. However, if the RUA related to any class of PPE
to which the revaluation model is used by lessee in accordance with AASB 116,
lessee has the option of applying the revaluation model for all the RUA that is related
to that class of PPE (Aasb.gov.au 2019).
After the date of inception the lessee is required to measure lease liability
through reducing carrying value for reflecting the lease payment made, increasing
the carrying value for reflecting the interest for lease liability, re-measurement of
carrying amount for reflecting the reassessment or the lease modification. Re-
measurement shall be carried out for the lease liability through discounting revised
lease payments applying the revised rate of discount if any change is there in
assessing the purchase option for the subjected asset that is assets with the
consideration of circumstances for purchase option or any change is there in the
term of lease where the lessee is required to determine revised payment for lease
based on the revised term of lease (Aasb.gov.au 2019).
In case of lease modification the lessee is required to judge the lease
modification as the separate lease if (a) the consideration of lease goes up by the
value of amount that is commensurate with the stand-alone value for increase in
scope and any applicable and appropriate adjustments to the stand-alone price for