Finance Lease Accounting: A Study of Manufacturer/Dealer Lessors

This essay delves into the accounting practices for finance leases by manufacturer or dealer lessors, examining the objectives of accounting standards concerning lessors and lessees, and the distinction between finance and operating leases. It discusses various lease types, including non-cancellable leases, and the conditions under which a lease is classified as a finance lease, such as transfer of ownership or bargain purchase options. The research highlights different revenue streams for lessors, like interest income and service payments, and addresses the justification for performance obligations in lease contracts, emphasizing the transfer of rights from lessor to lessee. Furthermore, it explores the determination of asset values under finance leases and the disclosure requirements for both lessees and lessors in sale and leaseback transactions. The study concludes that accounting for finance leases by manufacturer or dealer lessors prevents upfront revenue recognition, aligning with sales expectations upon completion of the production process.

Part A
Accounting for finance leases by manufacturer or dealer lessors
1

Contents
Introduction:....................................................................................................................................3
Main body:.......................................................................................................................................4
Conclusion:......................................................................................................................................7
References:......................................................................................................................................8
2

Introduction:
The boards have been presently developing diverse models for lessors of accounting which are
certainly based on the approach of a performance obligation. The other models such as de-
recognition model were not concerned as it would allow the lessors to have an up-front gain. The
task will be discussing the accounting for finance leases by the manufacturer or dealer lessors
where the types of lessors and leases will be discussed along with the various contracts that are
to be taken care of at the time of leasing certain situations. The ways in which existing rights are
transferred from the lessor to lessee instead of creating new rights will be also explained in the
research essay.
3

Main body:
The chief objectives of the accounting standards are for commending the lessors to the lessees
with the suitable policies of accounting and the other disclosures in relation to the operating
leases and the financial leases. The lease agreements can be developed to discover the diverse
natural resources such as oil, gas, timber and so on. The agreements of licensing can also be seen
in terms of pictures, patents or recordings. A lease is basically said as the agreement where a
lessor carries to the lessee in exchange for payments for the rights of exploiting certain things at
a specific passé of time. A finance lease is said as a lease that handovers the significantly all the
risks and rewards to the possession of the asset. An operating lease is said as a lease which is
provided other than the finance lease. There are various types of leases in accounting which are
leased by the manufacturer and the leaser. There is also a lease which is called as a non-
cancellable lease which can be canceled only at the time of incidences of certain eventualities
and also with the permission of the leasers (Wong and Joshi, 2015).
The term of the lease in the non-cancellable lease is for the certain period where the lessee had
been settled to take a lease on a certain type of asset. The extent to which the risks and the
rewards are possessed by the proprietorship of the asset which is leased it can classify as per the
accounting standard. Rewards can be expected as the operation of profitable economic life of the
leased assets and the gains form the operations of the leasing. A lease can be classified as a
finance lease only if it has been transforming significantly all the risks and the rewards to the
proprietor. Whether the lease is of finance or not can be dependent on the substances of the types
of transactions that are occurred (Dye, 2014).
The situations through which it can be easily identified whether the asset leased is actually a
finance lease or not as the lease can transform the ownership of a particular asset to the final end
of the term of lease, there are even certain options to purchase the assets at certain rates which
are certainly expected to be adequately lesser than the fair value at the date of the options that
have become exercisable in a way such that at the time of commencement of lease it can be
certainly reasonable with the option that is certainly exercised. For the chief of the economic life,
the lease term is there for the asset even if the title has not been transferred (Munter, 2018).
4

At the time of the beginning of the lease, it has been representing the values of the minimum
payments of the lease for which the amount to be paid is termed as per the substantially for all
the fair values of the assets. The asset which is leased should be of a specified nature which only
the lessee which he can use it in the chief modifications which have been made. The certain
suggestions which independently have a similar or combined to the lease for being classified as
the finance lease can be such as the lease which can be canceled for the lessor’s losses are
associated with the annulment are specifically carried out by the lessee. If the gains and the
losses from the changing fair value of the resident fall to the lessee (Bennett and Pierce, 2016).
The lessee can also continue the lease for the subordinate period for a certain rent which is
certainly lesser than the rent in the market. There are diverse kinds of revenues for the lessors
such as interest income which is the alteration between the sum of the entire rentals due to the
lessors and the original resonant value of the lessor’s receivable. This can be said as the rate that
the lesser is taking for giving the findings to the lessee for letting him use the assets. Under the
present guidance of the lessee, accounting interest can be determined as income over the term of
the lessee. The income of interest will always be classified as on the basis of the terms of the
lease. The other type of revenue for a lessor is of service payments that are associated with the
lease whereas a lessee may also provide with certain services such as insurance and maintenance
only if the lessor is taking substantial care of the asset. A lessee can always have a right and
ways to characterize the services that are provided by him (Gupta, 2015).
It is the duty of lessor to form the payments that are received by him in the terms of the physical
assets taken by him. The sales revenue is also a type of revenue which is earned by the lessee
where the manufacturing companies may be able to set up a company of leasing so that they can
provide the support of sales finance. Here the manufacturers will have to produce the goods and
have a certain cost of manufacturing for the sales. The manufacturers will also be calculating the
cost of sales which can certainly provide profits to the manufacturer. The third party lessors can
be said as the individual form of the manufacturer or a dealer. These dealers only seek to find out
the interests and then earn them. This kind of the lessors usually purchase the assets that they
want to lease and then they lease those certain assets to the market at retail prices. They do not
earn from the sales profit; they calculate the terms of the lease as there are no sales and also the
profits for the third party lessors. For justifying the performance obligation it can be certainly
5

said that the contract of lease can create the new rights. These are the reasons that the lessor does
not control or loses his specific rights over the assets. At the time of the lease, it is not lessor but
the lessee who holds the rights and controls over the asset that is specifically leased. The lessor is
not been able to utilize the assets at the time of leasing period. If it has been looked form the
conceptual point of view it can be said that there is no certain justification for the assets of lease
system (Murphy, 2016).
The lessee should certainly determine the assets that have been provided to him under the
finance lease that is available in the balance sheet as a certain attainable amount which is
equivalent to the certain net speculation in the lease. Underneath the finance lease noticeably all
the perils and the rewards and other risks to the lawful proprietor and are then moved to the
lessor. The lease payment which is conventional is then preserved by the lessor as an
reimbursement of principal. The identification of the income of finance should be on the basis of
the decorations that have been sparkly a constant episodic rate of return on the net investments
(Sunder, 2015).
The manufacturer or the dealer lessors that would determine the transactions of sales in the
statements of the profits and other losses of the period as per the policies which are then
followed by the enterprises are cleared. For functioning the leases if the fair value at the time of
sales and leaseback the dealings which is less than the resonant amounts of the assets. The
disclosure requirements for the lessees and lessors which they smear similarly at the sale and the
leaseback dealings which require the dealings of the significant leasing preparations for the
revelation of the exclusive and unusual provisions for the terms of the agreements which are to
be agreed by the lessees (Benmelech, et. al, 2017).
6

Conclusion:
As per the research, it can be concluded that the accounting for finance leases by the
manufacturer or dealer lessors are studied. The models of the accounting finance leases it can be
said that it leads to any of the up-front revenue of any of the kind which is one by the
expectations of the sales for the manufacturers by creating by specifically completing the
production process. In the research above the diverse kinds of the lessee, revenues have been
defined along with the explanation of why leasing is a transfer of existing rights or the creation
of the new fresh rights. The ways to find out if the lease did is financed lease or not have also
been presented in the task; it also reflects that the lessor business models and it cannot also force
to market the practice to a change in the assets.
7

References:
 Benmelech, E., Meisenzahl, R.R. and Ramcharan, R., 2017. The real effects of liquidity
during the financial crisis: Evidence from automobiles. The Quarterly Journal of
Economics, 132(1), pp.317-365.
 Bennett, V.M. and Pierce, L., 2016. Motivation matters: Corporate scope and competition in
complementary product markets. Strategic Management Journal, 37(7), pp.1304-1315.
 Dye, R., Glover, J. and Sunder, S., 2014. How Can Financial Reporting Standards Resist
Accounting-Motivated Financial Engineering?.
 Gupta, N., 2015. Differences in accounting treatment of Ijarah: a case study of UAE Islamic
banks. International Journal of Islamic and Middle Eastern Finance and Management, 8(3),
pp.369-379.
 Munter, P., 2018. Lessor accounting under ASC 842–Not necessarily business as
usual. Journal of Accounting Education.
 Murphy, M.L., 2016. Bringing Leases into View: With New Assets and Liabilities Coming
onto Balance Sheets, It's Time for Preparers and Practitioners to Act. Journal of
Accountancy, 221(4), p.23.
 Sunder, S., 2015. Financial Engineering and the Arms Race between Accounting Standard
Setters and Preparers.
 Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and
key ratios: Evidence from Australia. Australasian Accounting Business & Finance
Journal, 9(3), p.27.
8