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Accounting for leases

Payment Interest income Lease receivable

Lease commencement $3,722

Year 1 * $262 3,984

Year 2 1,100 203 3,087

Year 3 1,100 140 2,127

Year 4 1,100 73 1,100

Year 5 1,100 — —

$4,400 $ 678

* In year 1, payment was made at lease commencement, so it is not included in the lease receivable.

Interest paid to Lessor Corp at the beginning of year 2 would be accrued during year 1 (via a debit to
lease receivable and credit to interest income).

Lessor Corp would also record accretion on the residual asset. Like the interest on the lease receivable,
the accretion on the residual asset would be recorded during year 1 (via a debit to the residual asset
and credit to income).

Accretion Residual asset

Lease commencement $178

Year 1 $13 191

Year 2 13 204

Year 3 14 218

Year 4 15 233

Year 5 17 250

$72

Upon the expiration of the lease, Lessor Corp would reclassify the $250 net investment (which consists
solely of the residual asset based on the Lessor Corp’s business model) as PP&E or inventory. The
$250 represents Lessor Corp’s best estimate of the value of the asset established at the beginning of
the lease.

4.5.2 Lessor operating leases

Since a lessor in an operating lease does not derecognize the underlying asset, it should continue to
depreciate the asset in accordance with its normal depreciation policy. The lessor should record lease

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