When none of these additional criteria are met, the lessor classifies a lease as an operating lease. If this is not the case, then the lessor has a choice of designating a lease as either a direct financing lease or an operating lease.
Cash Flow Statement : Under U. It is argued that by applying substance, the financial statements become more reliable and ensure that the lease is faithfully represented. The present value of the sum of all lease payments and any lessee-guaranteed residual value matches or exceeds the fair value of the underlying asset.
The lessor is the legal owner of the asset, the lessee obtains the right to use the asset in return for rental payments. When none of the preceding criteria are met, the lessee must classify a lease as an operating lease.
The accounting and reporting of different leases are done as follows: Accounting for Finance Lease by Lessee The finance lease is reported by the lessee as follows on different financial statements: Balance Sheet: Both leased asset and lease payable liability is reported.
Record any impairment of the net investment in the lease. To allocate the interest to a specific period you will require the interest rate implicit within the lease agreement — again this will be provided in the exam and you are not required to calculate it.
The lessee has a purchase option to buy the leased asset, and is reasonably certain to use it.
Cash Flow Statement: The complete lease payment or the rent expense is reported as operating cash outflow. Cash Flow Statement: The periodic lease payment is categorized as an operating cash inflow.