Page 143 - F2 Integrated Workbook STUDENT 2019

Leases

Leases

1.1 Introduction

If an entity requires certain assets (typically PPE) to use within its operating activities,
the entity may have a number of options for financing that purchase. They may:

 pay for it outright

 take a loan out to pay for the asset, or

 they may lease the asset over a certain period.

Leases are useful from a cash flow perspective as the entity gets the right to use the
asset on a day to day basis but will pay lease rentals over a period of time rather
than buying the asset outright.

1.2 Definitions

A lease is a contract that conveys the right to use an underlying asset
for a period of time in exchange for consideration.

The lessor is the entity that provides the right-of-use asset and, in
exchange, receives consideration.

The lessee is the entity that obtains use of the right-of-use asset and, in
exchange, transfers consideration.

A right-of-use asset represents the lessee's rights to use an underlying
asset (e.g. machinery. buildings) over the lease term.

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