Operating lease or operating lease - English operating lease, is a contract that allows the tenant to use the property for the short term without taking ownership. An example operating lease may serve as a commercial property lease by a business owner, an aircraft lease by an airline, or a lease industrial equipment manufacturers. There are many reasons to choose an operating lease over other types of leases or outright purchase of an asset.
In the case of an operating lease, the term of the contract is usually significantly shorter than the period useful operation leased property. This type lease agreement ideal for tenants who need to use a property without buying it. Owning property usually comes with many responsibilities and risks that may not be acceptable. An operating lease provides much more flexibility, which can be very beneficial for the tenant, and a well-drafted lease can reduce the cost of doing business.
The opposite of an operating lease is a finance lease, the contract of which partial transfer ownership. There are several criteria that allow a lease to be classified as a finance lease. However, it should be noted that these criteria different countries established by law and may vary significantly. For example, in the United States, a finance lease must meet four basic criteria:
- the contract must provide for the tenant's right to take ownership of the asset at the end of the lease term;
- buyback price must be lower than the current (at the time of contract expiration) fair market price asset;
- the term of the contract must be at least 75% of the expected useful life of the asset;
- the total amount of all lease payments must be at least 90% of the original amount paid by the lessor to acquire the asset.
Also, finance leases and operating leases are presented differently in the financial and tax statements and in other financial information statements. Since these differences are significant, in many countries the criteria for classifying a contract as an operating or finance lease are clearly defined by law. This is especially important for publicly traded companies, as their reputation depends on clean and transparent financial reporting.
The terms of an operating lease can vary considerably, so carefully reviewing and evaluating the terms is extremely important for any tenant. If the parties disagree about the terms, or find certain language in an operating lease agreement incorrect, they must resolve the conflict before the agreement is signed and the parties enter into certain obligations. The fact of signing the contract makes it much more difficult to challenge its terms, which can lead to losses for both the tenant and the landlord.
Rent includes fair valuation and interest ( IAS17).
Lease is used in the forms of operating lease (operating lease) and financial lease, or leasing (financial lease / leasing). It is governed by IAS 17. Under an operating lease, the asset is on the balance sheet of the lessor, depreciated and depreciated in accordance with its accounting policies. Therefore, the lessor bears significant risks and rewards. Rental income is not discounted. Rent from the tenant is an ongoing cost of rent and is included in expenses in accordance with the rental income scheme. Financing of costs for the repair of the object is determined by the agreement of the parties. Operating lease can be short-term and long-term (over a year).
In a financial lease, the lessee (lessee) uses the leased facilities to produce, sell, receive revenue - but also bear the risks associated with the leased facility (depreciation, repair, unprofitability). In this case, the object is the property of the lessor (lessor), and the tenant only owns it. Of course, he can buy the object at the end of the lease period, but before that he is obliged to pay the entire rent to the landlord, i.e. actually paying the rent.
Leasing protects the interests of the lessor, therefore the lease agreement is irrevocable for the lessee (only the lessor can change it), the rent contains the fair value of the asset and interest (credit financial instrument), the lease term is long (exceeds half of the useful life of the object), impairment is recognized by the lessee. If there are no listed signs, then the lease in the reporting is recognized as operating, regardless of its term. In general, the classification of a lease depends on the true economic substance of the transaction, and not only on its legal form. Leases are not applicable for natural resources and for a number of goods (movies, videos, plays, manuscripts, copyrights). For these objects, the lease of rights in the form of concessions and royalties is applied. Lease of land is considered operational, but if it is associated with a buyout, then it is financial.
Why is leasing used in business, despite the cash outflow, which ultimately covers (by 2-3 times) the costs of a one-time purchase of an object? The fact is that the object of leasing is highly specialized equipment, which is not available on the free market. It is ordered by the tenant in order to benefit from the release and sale of new products and to occupy a new market niche. In addition, under leasing, they acquire such an expensive object that it is more profitable to take not a bank loan at interest for its purchase, but to gradually pay off the landlord.
Before the start of the lease, the tenant manager answers the question about the ownership of the object after the end of the lease: either it is returned to the landlord, or it is redeemed by the tenant. The tenant will be the first in the buyout queue, but will buy it at the market price, taking into account the depreciation of the object. This side of the lease agreement should be decided in advance, since the object is depreciated as if it were own. The uncertainty may lie in the amortization period. If the tenant is uncertain about the right to buy out the object, the start of depreciation is the earlier of the dates: conclusion of the contract / start beneficial use asset. The rent contains the cost of the object and the rental percentage:
Rent = minimum rent payments(minimum lease payments, MLP) + lease interest (lease interest)
MLP means the nominal value, which is calculated at the internal rate of return / internal interest rate / effective rate (internal interest rate, IIR; internal return rate, IRR; effective rate) of all rent; if such a rate is unknown, then the rate on borrowed capital is applied. Rental interest is charged on the MLP under the bank loans scheme - on the balance j of the debt, which means the amortized cost. Therefore, leasing is a financial instrument. The scheme for calculating the depreciable cost of leasing is recognized in IAS 17 as the most correct, which does not exclude the use of other schemes similar to the methods of depreciation of fixed assets - by the sum of years, linear. The initial costs of leasing management are recognized as current for the lessor, but are included in the book value of the lessee (for operating leases, on the contrary, in the book value of the lessor and I in the current expenses of the lessee).
If the leased asset is not transferred to the balance sheet of the lessee, but remains on the balance sheet of the lessor, then no depreciation is charged, and rent is reflected instead. This scheme may be beneficial for the lessor if he fears the risk of losing the asset (possible bankruptcy of the tenant, instability of the region's economy). But such an approach means a deviation from IAS 17. It is acceptable only for a reliable presentation of the company's activities in its reporting, and in the accounting policy the deviation is disclosed with the calculation of the financial impact (IAS 1).
In general, the actuarial approach is called the gross investment in lease method, and the transfer of income from deferred to current rental income for each reporting period is called the net investment in lease method.
There is also a leaseback, in which the asset is first sold and then taken back, but on lease (operating/leasing). This scheme has whole line Benefits for the lessee: receipt of cash payment in full, recognition of revenue and profit from the sale of the asset. Rental costs will reduce profits, but there may be more benefits from leasing back. It is not prohibited by IAS 17, but is regulated so that the excess of revenue over the carrying value of the object is recognized as deferred income of the tenant and is included in profit not immediately, but during the leaseback period. For sales below fair value, a loss is recognized immediately.
Leasing is a complex financial process. The lessee will end up paying more for the asset than if he had bought it, while the lessor fears the risks of losing the asset. Therefore, the lessee's manager calculates whether it would be cheaper to buy an asset with a loan, and the lessor's manager thinks over the leasing scheme, income and possible risks. A change in the form of a lease is considered a change in accounting policy, which means a retrospective restatement of the financial statements.
The explanations reveal material contracts under lease, including under leasing: the lessee - leased objects at book value and MLP, lease expenses and the method of their recognition, lease liabilities indicating the amounts and terms of accrual (up to a year, from 1 year to 5 years, over 5 years), depreciation costs; lessor - rental income and the method of its recognition, including forthcoming and shortfall, indicating the amounts and terms of accrual (up to a year, from 1 year to 5 years, over 5 years). For operating leases, the value of the leased assets, depreciation accrued by the lessor, MLP by periods (up to a year, from 1 to 5 years, over 5 years) are indicated. Subleases are also disclosed by payment and period.
Lease - fixed-term paid use of property, based on the contract, necessary for the tenant to carry out entrepreneurial and other activities.
The subject who took the property on lease is called the tenant, and the one who provided this property is the lessor. The relationship between the tenant and the landlord is determined by the lease agreement. An agreement on the transfer by the tenant of the object leased by him to a third party is called a sublease. The methodology for accounting for lease relations is established by P (S) BU 14 "Rent".
An operating lease is a lease other than a finance lease.
Sublease - an agreement on the transfer by the tenant of the object leased by him to a third party.
A finance lease is a lease that transfers to the lessee all the risks and rewards incidental to the right to use and own an asset. A lease is considered a finance lease if at least one of the following is true:
The lessee acquires ownership of the leased asset at the end of the lease term;
The lessee has the ability and intention to acquire the leased property at a price below its fair value at the acquisition date;
The lease term is the majority of the useful life (operation) of the leased asset;
The present value of the minimum lease payments from the beginning of the lease term is equal to or greater than the fair value of the leased item.
Property transferred under an operating lease agreement remains on the balance sheet of the lessor. At the tenant such property is taken into account for the balance sheet. Property transferred under a financial lease agreement is credited to the lessee's balance sheet. The transfer and return of the leased object is documented by an act of acceptance and transfer.
Fixed assets transferred for operating lease remain on the balance sheet of the lessor and are accounted for on account 10 "Fixed assets" with allocation in the analytical accounting registers in a separate group, in which it is noted that these objects are transferred to operating lease.
The lessee accounts for the leased objects on the off-balance account 01 "Leased non-current assets". He must have a copy of the inventory card or an extract from the inventory book attached by the lessor to the act of acceptance and transfer of leased objects. These cards are kept separately by the tenant. After the lease object is returned to the lessor, the lessee writes it off from the off-balance sheet, removes a copy of the corresponding card from the file cabinet and, together with the acceptance certificate, files it to the documents for the current month. When transferring an object for rent, the recipient submits a power of attorney to the lessor to receive the valuables. The return of the object from the lease is also issued using a power of attorney.
The lessor (owner) accrues depreciation according to the established norms for leased objects: the debit of account 23 "Production" (a separate sub-account for accounting for expenses for rental services) and the credit of account 13 "Depreciation (amortization) of non-current assets". The debit of account 23, in addition to depreciation, also includes other expenses associated with the operation of the leased object, if they are performed by the lessor. The lessor's expenses related to the conclusion of the lease agreement (legal services, commission fees) are recognized as other operating expenses of the reporting period in which they occurred. From account 23, expenses are monthly debited to the debit of the subaccount.
If the landlord receives the rent in advance, then he first reflects it as part of deferred income: the debit of account 31 "Accounts in banks" and the credit of account 69 "Deferred income". At the same time, the tax liability for VAT is shown: the debit of subaccount 643 "Tax liabilities", the credit of subaccount 641 "Calculations for taxes". In the following months, according to the terms of the lease, the rental income is reflected: account 69 debit, subaccount credit. The tax liability for VAT is set off: debit of subaccount 713, credit of subaccount 643.
Operating lease income is recognized as other operating income for the respective reporting period. A subaccount is debited for the amount of rent due to be received and subaccount 713 "Income from operating lease of assets" is credited. Value added tax in case of lease relations is taken into account in accordance with the established procedure.
The amount of rent due under the contract is charged by the tenant to expenses on a monthly basis: the debit of accounts 23, 91, 92, 93, 94 (depending on the place of use of the leased object) and the credit of account 68 "Calculations for other operations". Repayment of rent arrears - account 68 debit and account 31 credit "Accounts in banks".
Correspondence of accounts when accounting for operating leases from the lessor is given in Table. 6.14, and for the tenant - in Table. 6.15.
Table 6.14. Recording of operating lease transactions at the lessor
|
Account correspondence |
Amount, thousand UAH |
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|
debit |
credit | ||||||
|
The property was leased |
10 "Fixed assets (leased)" |
10 "Fixed assets" |
|||||
|
Depreciation of the leased property |
23 "Production" |
13 "Depreciation (amortization) of non-current assets" |
|||||
|
Accrued expenses for concluding a lease agreement (legal services, commission) |
23 "Production" |
685 "Settlements by 3 other creditors" |
|||||
|
Recorded rental expenses |
949 "Other operating expenses" |
23 "Production" |
|||||
|
The rent paid |
377 "Settlements with other debtors" |
713 "Income from operating lease of assets" |
|||||
|
Reflected value added tax (VAT) |
713 "Income from operating lease of assets" |
648 "Tax liabilities" |
|||||
|
Rent received |
377 "Settlements with other debtors" |
||||||
|
VAT charged (optional obligations |
643 "Tax liabilities" |
641 "Tax calculations" |
|||||
|
Charged to financial results: a) rental income |
713 "Income from operating lease of assets" |
79 "Financial results" |
|||||
|
b) expenses |
79 "Financial results" |
949 "Other operating expenses" |
|||||
|
Returned by the tenant to the leased object |
10 "Fixed assets" |
10 "Fixed assets (leased)" |
|||||
Table 6.15. Recording operating lease transactions at the lessee
|
Account correspondence |
Amount, thousand, UAH |
||||||||||
|
debit |
credit | ||||||||||
|
take the property for rent |
01 "Rented non-current |
||||||||||
|
The rent paid |
23 "Production", 93 "Distribution costs" |
||||||||||
|
Reflected VAT for rent |
644 "Tax Credit" |
685 "Settlements with other creditors" |
|||||||||
|
Accrued VAT (tax credit) |
641 "Tax calculations" |
644 "Tax Credit" |
|||||||||
|
Paid rent |
685 "Settlements with other creditors" |
311 "Current accounts in national currency" |
|||||||||
|
Accrued for services provided by other parties (for public utilities, electricity, security, etc.) |
23 "Production", 91 "General production costs", 92 "Administrative expenses", 93 "Distribution costs" |
685 "Settlements with other creditors" |
|||||||||
|
VAT charged for services |
641 "Tax calculations" |
685 "Settlements with other creditors" |
|||||||||
|
Paid for services provided by other parties |
685 "Settlements with other creditors" |
311 "Current accounts in national currency" |
|||||||||
|
Reflected the cost of completion in the composition of fixed assets |
117 "Other non-current assets" |
15 "Capital investment" |
|||||||||
|
The leased object was returned to the lessor |
01 "Leased non-current assets" |
||||||||||
|
Written off the cost of completing the leased facility |
972 Impairment Losses |
117 "Others non-current |
|||||||||
|
Accrued for work on completion |
377 "Settlements with other debtors" |
||||||||||
|
Reflected VAT |
742 "Income from the restoration of usefulness of assets" |
641 "Tax calculations" |
|||||||||
|
Received from the lessor for the completion of the leased object |
311 "Current accounts in national currency" |
377 "Settlements with other debtors" |
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Pavel Anikin, Audit Director of CJSC RUFAUDIT, member of the RCA, certified accountant-practitioner (CA P)
When accounting for leases under both Russian and international standards, the financial services of companies have a lot of questions. How to classify it? Who should reflect the property on its balance sheet - the lessor or the lessee? How to allocate income and expenses between reporting periods? In the article, we will consider the differences in approaches to solving these problems, which are offered by IFRS and RAS.Lease: operating or financial?
In order to correctly reflect the lease agreement in accounting, it is first necessary to find out what type it belongs to: operating or financial, that is, leasing.
Let's start with Russian legislation. To answer this question, you need to refer to the Federal Law of October 29, 1998 No. 164-FZ “On Financial Lease (Leasing)” (hereinafter referred to as the Law on Leasing). According to him, the content of the lease agreement should be as follows. The lessor acquires ownership of the property that the lessee has chosen from a specific seller. The landlord must provide the tenant with this property for temporary possession and use for a fee.
Respectively, lease relations under such agreements are referred to as leasing. All other leases should be accounted for as other leases, that is, operating leases. Thus, the lease is classified solely depending on how the contract is executed. Please note: the manufacturer cannot act as a lessor in relation to its own products.
In turn, IFRS subdivide the lease into financial and operating, depending on the economic content of the transaction. First of all, it is necessary to find out who bears the risks associated with owning an asset and benefits from its use.
Thus, international standards refer to leasing as the lease of property, all the risks and economic benefits from the use of which have been transferred from the lessor to the lessee.
"International" signs of leasing
IFRS offers 5 criteria by which to determine whether the risks and economic rewards associated with a leased asset have actually passed from one partner to another:
1. By the end of the contract term, the lessee becomes the owner of the asset. Since the property will remain with the lessee for its entire useful life, the risks and rewards will be transferred to the lessee.
2. At the end of the lease term, the lessee has the right to purchase the asset at a price that is significantly lower than its fair value at the time of such transaction. At the same time, the tenant, even at the conclusion of the lease agreement, must be sure that the property will be sold to him. That is, at the end of the lease term, ownership of the asset must pass to the lessee, although this is not subject to the obligations of the parties to the agreement.
3. The lease term is a significant portion of the useful life of the asset. In this case, the ownership of the property may not be transferred to the tenant. But since he will use the object for most of its useful life, he will also derive the bulk of the economic benefits.
Note that IFRS do not establish clear criteria by which to determine what part of the life of an asset is significant. In practice, 75 percent is usually used. Keep in mind, however, that this is only an approximation. It does not always indicate that the lease should be classified as finance.
4. The present value of the lease payments at the date of signing the contract is equal to the fair price of the asset or constitutes a significant part of it (in practice, 90 percent is used). That is, in the described situation, the tenant actually buys the object with an installment payment.
5. The property is such that only the tenant can use it without major modifications.
So, the lease agreement is classified. If this is an operating lease, then the differences in accounting under RAS and IFRS will be insignificant. But the rules for accounting for finance leases are fundamentally different.
Balance dispute
It is necessary to find out which of the parties to the financial lease agreement will accept the property on its balance sheet.
In Russian accounting, the text of the contract will be decisive. After all, partners can decide on the subject of leasing by mutual agreement (Article 31 of the Law on Leasing).
In accordance with the requirements of IFRS, if the lease is classified as a finance lease, then the lessor must write off the property from its balance sheet. The tenant must take into account the values at home. In Russian accounting, the asset may remain on the balance sheet of the lessor by agreement of the partners. In this case, the lessee will account for such property on an off-balance sheet account.
Accounting for a finance lease by a lessee…
1. initial recognition. At the beginning of the lease term, the lessee needs to show on its balance sheet the assets received and the resulting liabilities. IN general case property is valued at fair value. If it turns out to be more than the discounted amount of the minimum lease payments, an entry is made in the accounting for the amount of the rent. That is, property is reflected at the lowest of the two estimates (the principle of conservatism).
The present value of the minimum lease payments is determined based on interest rate mortgaged for rent. The latter is also called the implied rate, which is the rate that the lessor used to calculate the lease payments. Of course, in most cases, the tenant is not aware of it. Then you need to use the interest rate of a bank loan, the payment schedule for which would correspond to the terms of the leasing agreement.
If the present value of the minimum lease payments is less than the fair value of the property, it must be increased to the value of the latter. All initial expenses of the tenant will be included in the amount for which he will take the property into account.
The rules for reflecting finance leases in Russian accounting are different. So, if, under the terms of the contract, the tenant must accept the leased asset on his balance sheet, he will take it into account at the nominal amount of lease payments. That is, RAS does not take into account the time value of money.
In IFRS, the lessee shows its obligations to the lessor also at a nominal value. But at the same time, he introduces an additional account, which reflects the amount of future interest expenses. As a result, the discounted amount of the debt will be included in the balance sheet.
2. Cost accounting. Under IFRS rules, the lessee's expenses mainly consist of two components: depreciation of the leased asset and interest expense.
In RAS, the parties to the agreement, by agreement, can apply accelerated depreciation of leased property (Article 31 of the Law on Leasing).
Under IFRS, the lessee must depreciate the leased assets in accordance with the rules that it applies to similar property. At the same time, he cannot install accelerated depreciation.
Interest expense on the use of leased property is reported using the effective interest method 1, similar to interest on the company's long-term liabilities. But in Russian accounting, interest expenses are not shown. Rental costs will either consist solely of lease payments (when accounted for by the lessor) or accrued depreciation (when accounted for by the lessee).
… and the landlord
1. initial recognition. If the lessor is not the manufacturer or dealer of the leased property, it must recognize a "receivable" in its balance sheet when the asset is transferred. The rules for its assessment are the same as for the tenant's debt: the total amount must be shown at face value. You also need to enter an additional account to account for future interest income. As a result, the balance sheet will contain the current value of the debt. These are the requirements of IFRS. Concerning Russian accounting, then the accounts receivable are reflected in the full amount, that is, at the nominal value.
2. Recognition of income. Under international accounting standards, both the lessor and the lessee must report interest income over the life of the lease. And they need to do it systematically and rationally. The rate of permanent profit is distributed among the lessor's net unpaid investment in the lease. The latter represent the difference between the nominal amount of debt and the amount of interest income that has not yet been received. Thus, we are talking about the same method of effective interest rate.
According to the RAS rules, the lessor can reflect income in two ways. The choice between them depends on which of the partners takes into account the property on its balance sheet - the lessor or the lessee.
In the first case, the income of the lessor will be the amount of lease payments under the contract. In the second, the difference between the nominal amount of all payments and the actual value of the transferred asset should be deferred. In the income statement, this amount is reflected based on the terms of the lease agreement, and not evenly, as in IFRS.
3. Accounting commercial lease. There is another important difference between IFRS and RAS. It is connected with the so-called commercial lease. They talk about it when the seller of property acts as a lessor. That is, when the lease is essentially an alternative to the purchase of an asset. In such a situation, IFRS requires the lessor to divide its income into two types:
- profit or loss that is equivalent to the proceeds less costs from the sale of the leased asset for market prices taking into account all discounts - as of the date of reflection in the accounting of the lease of property;
- interest income for the duration of the lease.
Thus, Russian rules Accounting for finance leases are significantly different from international ones. First of all, due to the fact that the accounting procedure is largely determined by the specifics of a particular transaction, that is, the terms of the leasing agreement. When accounting for this type of lease under IFRS, it is necessary to observe the principle of priority of the economic content of the agreement over its form. Differences in accounting for finance leases are also due to the fact that there is no concept of the time value of money in RAS. Therefore, domestic companies cannot equally allocate interest income and rental expenses on the basis of the effective interest rate.
Differences in accounting for leases under Russian and international standards
Accounting procedure |
||
| Lease classification | Based on the terms of the contract | Depends on the economic content of the transaction |
| Accounting for leased property on the balance sheet of the lessor or lessee | Specified in the contract | The lessee always takes the asset into account on its balance sheet |
| Accounting for the transfer of property from the tenant | According to the nominal amount of lease payments in the balance sheet or on the off-balance sheet account | The lower of the two values - the fair value or the present value of the lease payments |
| Reflection of expenses by the tenant | Costs consist of either lease payments or depreciation of the asset (accelerated depreciation allowed) | Property is depreciated according to the general rules. Interest expense is recognized using the effective interest rate |
| Accounting for the transfer of property from the lessor | If an asset is written off the balance sheet, accounts receivable are recorded at a nominal amount | Show the discounted amount of accounts receivable |
| Reflection of income by the lessor | In accordance with the terms of the contract | Based on effective interest rate |
| Trade lease accounting | There is no concept of commercial lease | In addition to interest income, take into account the profit or loss on the sale of an asset |
