Corporate Accounting and Reporting: Understanding Lease Agreements and Impairment Loss

CORPORATE ACCOUNTING AND REPORTING

Part A:
A lease can be defined as a financial agreement between two parties i.e. the owner of the
asset and the party which is going to hold the asset for a specified period of time in return for
agreed periodic payments (Atkinson, 2012). The two parties are stated to be as the lessor i.e.
the owner of the asset and the lessee i.e. the party that has borrowed the asset. All the
payments that are involved for this transaction are stated to be as the lease rentals. There are
generally two types of categories under the lease agreements which are: Financial lease and
operating lease (Berry, 2009).
The financial lease: A financial lease abide by the following points-
• The current value of the asset is almost equal to the price of the lease rental upon which
both the parties have mutual thoughts.
• The stated time period for the agreement is almost equal to the lifespan of the asset.
• If there is a condition stated in the lease about paying a nominal amount and owning the
asset at the time of the end of the lease term.
The operating lease: A lease can be stated to be an operating lease if it does not satisfy any of
the above factors.
The lessor as well as the lessee treats operating lease as a normal rental contract (Fridson &
Alvarez, 2012). However, the treatment of finance lease in both the parties account is
different. The lessee states the financial agreement in a more proper manner in the books of
accounts. The date, on which the parties enter into the lease contract, it is significant for the
lessee to record all the data in the books of accounts in relations to the leased asset and the
liability of the lease (Girard, 2014).
The right to use the asset can be valued by understanding the following:
• The value at which the lease liability is determined.
• Any type of payment made by the lessee in relation to the initiation of the lease
agreement.
• Any type of direct cost that has been incurred y the lessee in relation to the lease contract

• Any other cost that will be paid by the lessee in order to bring the asset to be put in a
condition to using.
All the above-accounted figures will be used in order to record the right value of the asset in
the balance sheet of the lessee (Knubley, 2010).
There are various factors that are needed to be taken into consideration by the lessee in order
to find the actual value of the ease liability. An implicit rate is used by the lessee to calculate
the present value of the periodic lease payments. If there is any condition in which the value
of the liability is not possible to assess, then the rate of the borrowing cost charged by the
lessor can be used (Lyon, 2010).
The value of the lease liability which is determined on the basis of the lease payments is said
to include the following:
• The total of any of the fixed payments including the benefits that are needed to be made
by the lessee or yet to be received.
• The lease payments that are being made by the lessee and are thus required to be paid on a
specified index rate which is determined using the initial date of commencement of the lease.
• Any other payment or residual value that the lessee agrees to pay it.
• Penalties that are to be paid by the lessee in case of early termination of the contract.
Also in relation to the right to use the asset, the asset is said to be valued using the cost
model. Using the cost model makes it necessary for the lessee to determine the value of:
• Depreciation of any impairment loss in relation to the asset that has been leased.
• Adjustments that have been made in the value of the lease liability.
It is clearly stated that it is necessary for the lessee to calculate all the values of depreciation
and impairment losses by using the application of the accounting standards. There are various
values that are needed to be ascertained by the lessee while adjusting the amount of the lease
liability:
• The e value of the lease liability increases with the amount of interest.
• Subtracting the amount that has already been paid.