Financial Lease Accounting for Dealer Lessor

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ACCOUNTING

Financial lease
Part - A
A lease agreement is a contract that happens between two parties that is the lessor and the
lessee. The lessor can be defined as the owner of the asset that is the lessee will have the right
to utilise the asset in return for the payment of the rent. Historically, assets that are utilized
but not own are not projected on the statement of financial position, and hence, any liability
that is associated was also ignored out of the report – this was termed as off-balance sheet
finance and in a manner were able to keep the obligations low hence, distorting the gearing,
as well as main financial ratios (Deegan, 2011). This manner of accounting does not project
the transaction. The company often effectively own assets, as well as liability. When it comes
to modern-day accounting, the IASB framework provides that an asset is defined as a
resource controlled by an entity due to the past events, and from where the future economic
advantage are expected to accrue to the object and arise from the events of the past, the
settlement is likely to lead to the outflow from the entity of resources that embodies
economic benefits (Kieso et. al, 2010).
Lease accounting can be commented as a vital accounting section because it differs
depending on the end users. A lessor and the lessee report is prepared, and hence, accounting
of the leases happens. A lessor is the owner of the asset, and the lessee uses the leased asset
by making payment to the lessor. The accounting, as well as reporting of the lease in a
different manner has various impacts on the financial statement and ratio.
Finance lease accounting for Dealer Lessor
The initial accounting rests on the fact that the lessee must capitalise the finance leased asset
and establish lease liability for the valuation of the assets that are recognised. The accounting
for dealer lessor will be done in the following manner.
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Financial lease
Non-current account Dr
To, Finance lease liability
(This needs to be projected by utilising the lower of the fair value of the asset or the PV of the
minimum lease payments. The PV of the lease payment on a minimum basis is essentially the
payment of lease over the discounted lease life. When it comes to the lessor, the commercial
lease can be commented to be of two major types resting under U.S GAAP. If the PV of
every lease payment is same as the carrying value of the leased asset, such lease is defined as
the financing lease. If the PV of the lease payment exceeds than the carrying value of the
leased asset, it is stated as a sales-type lease (Hamilton, Hyland & Dodd, 2011). Both the
lease are reported by the lessor ass reflected on various financial statements.
Balance sheet - The receivable lease is reported. The value is attained from the PV of the
lease that will happen in future. Even, the assets are reduced by the BV of the asset that is
leased (Needles & powers, 2013).
Income Statement – the reporting of revenue interest is done. The calculation is done on the
receivable lease at the beginning by utilising the lease interest rate.
Cash flow statement – the interest element of the lease revenue is projected as the operating
cash inflow, and the principal component of the payment is done as an investing cash flow.
When it comes to a financial lease, the dealer lessor takes into consideration the finance
income so that the regular periodic rate of return is reflected on the net investment in the
finance lease. This is attained by the allocation of the rentals that is net of any charges, etc.
received by the lessor that lies between the finance income to the lessor and the repayment of
the balance of the debtor (Petty et. al, 2012). When the lease commences, the dealer lessor
that is the company A will derecognise the asset and recognise when the finance lease is
receivable. The net investment in the lease will be termed as the lease receivable that is
computed as overall of the PV of the minimum lease payment that contains yearly rent and
the residual value that is unguaranteed (Hall, 2018). The PV of the minimum lease payment
is generally computed utilising the interest rate implicit observed in the lease. As per IAS
17:4 this rate is commented as the rate of discount that at the beginning of the lease leads to
the total of the present value of the payment of the minimum lease and residual value that is
unguaranteed that would be equivalent to the FV of the leased asset and any other cost that is
of direct nature.
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