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Accounting for leases

Other □ Title to the automobile remains with Lessor Corp upon
lease expiration
□ The expected residual value of the automobile at the end
of the lease term is $19,000; Lessee Corp does not
guarantee the residual value of the automobile at the end
of the lease term
□ Lessee Corp pays for all maintenance of the automobile
separate from the lease
□ There are no initial direct costs incurred by Lessee Corp

□ Lessor Corp does not provide any incentives

Lessor Corp determines that the lease is an operating lease.

How would Lessor Corp measure and record this lease?

Analysis

Since the lease is classified as an operating lease, no asset or liability would be recorded at lease
inception. Lessor Corp would keep the automobile on its books as an asset and depreciate it in
accordance with its normal depreciation policy.

See Example 4-15 for an illustration of the subsequent measurement and recognition for this fact
pattern.

4.4 Subsequent recognition and measurement – lessee

Over the lease term, a lessee must amortize the right-of-use asset and record interest expense on the
lease liability created at lease commencement. The income statement recognition and classification are
based on how the lease is classified. See LG 3 for information on lease classification.

4.4.1 Finance leases

Finance leases are accounted for in a manner similar to financed purchases. The right-of-use asset is
amortized to amortization expense. Interest expense is recorded in connection with the lease liability.
Figure 4-2 describes how these amounts are recognized.

Figure 4-2
Lessee finance lease expense recognition

Expense classification Income statement recognition pattern

Amortization expense Straight-line recognition over the shorter of the useful
life of the asset or the lease term

Interest expense Interest method

4-28