Develop Phase: Licenses and Leases - Leases
7 important questions on Develop Phase: Licenses and Leases - Leases
Which two non real property types of lease exist?
What is meant by financial lease?
The lessee pays rent during the term, which allows the finance company to recover the cost of the asset and earn interest.
The term of the lease is normally the same as the useful life of the equipment.
Who is legal owner of the asset and who has the control?
The way this is expressed for accounting purposes is that the lessee has substantially all of the risks and rewards' of ownership.
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Which principles impact apply with such financial lease?
- A finance lease is capitalized, so both assets and liabilities increase on balance sheet.
- Expenses for a finance lease are allocated between interest expense and principal value in the same way as a loan.
- Operating lease obligations are not recognized on the balance sheet. They are operating expenses deducted from profits.
- Rules classifying leases as financial leases or operating leases are more rigid in the US than in other regions.
What is operational lease?
monthly rental does not generally cover the cost of the asset.
Used for expensive industrial equipment.
Ownershio of the asset does not pass to the lessee at the end of an operating lease.
What can the lessee decide at the end of an operational lease?
- Return of the equipment to the lessee
- Renewal of equipment lease
- Purchase of equipment at its market value.
What are benefits to operational lease?
- Of impact on the balance sheet.
- Cash flow may be improved.
- Tax treatment maybe favorable depending on the jurisdiction.
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