Finance Lease Vs Operating Lease

Richard08

Hi Everyone,

I have a question which i would appreciate if you could shed some light into.
I am very new to the subject of property lease could you explain it in a simple way?


What is the difference between finance and operating lease for property lease? Who ultimately owns the property? are there any difference in accounting treatment for either lease type. Do you capitalise the leasehold property to the balance sheet for either lease type or not? Do you depreciate or not? Is there premium to pay on either lease type and what is the accounting treatment for it?

Any insight, thoughts, comments would be greatly appreciated.

Thank you

Richard

stephen0183

A finance lease is where all the risks and rewards of ownership are transferred to the lessee (the company using the asset). This will be capitalised and included in the lessee's Balance Sheet as a Fixed Asset.

An operating lease is where the lessor (the company who legally owns the asset) takes the risk and reward. Each payment by the lessee would be charged to P&L in the lessee's accounts.

In both cases, the lessor owns the property.

peugeot

Where property is concerned it can sometimes be a bit confusing.

Under IAS 17 (Leases), separate determinations have to be made for both the land and building components. Unless the lease terms contain a provision for passage of title at the end of the lease then the fact that the land has an indefinite life makes the 'land lease' an operating lease. The buildings element may require further analysis but where the lease is a long one (say 99 years) then there is a good chance the buildings part of the lease can be regarded as a finance lease and would be depreciated over the term of the lease.

I think for AAT purposes a property lease might give you the split.

There's also an article of mine on IAS 17 that may help you, here:

http://www.accountancystudents.co.uk/cms/news/read/ias_17_leases/


Kind regards
Steve