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| Corporate Accounting Treatment |
Accounting treatment for operating lease-With Practical Example:
The accounting treatment for an operating lease under IFRS 16 and US GAAP involves different approaches for the lessee and lessor. In an operating lease, the ownership of the asset remains with the lessor, and the lessee only records the lease payments as expenses. The lease does not transfer ownership or risks and rewards associated with the asset to the lessee.
Accounting Treatment for Operating Lease:
1.For Lessee (IFRS 16):
IFRS 16 requires lessees to record most leases (including operating leases) on the balance sheet. However, for operating leases, lessees recognize a right-of-use asset and a corresponding lease liability.
Lease Payment Recognition:
Lessees must recognize lease payments as an expense in the income statement over the lease term.The expense is typically straight-lined unless another systematic basis is more appropriate.
Journal Entries:
At Lease Commencement:
Debit: Right-of-Use Asset (Balance Sheet)
Credit: Lease Liability (Balance Sheet)
Subsequent Lease Payments:
Debit: Lease Liability (Balance Sheet)
Credit: Cash/Bank (Balance Sheet)
Debit: Amortization/Depreciation of Right-of-Use Asset (Income Statement)
Credit: Accumulated Depreciation (Balance Sheet)
Example:
Suppose a company leases an asset for Tk. 5,000 per year for 5 years. At the commencement, the right-of-use asset and lease liability are recorded. The lease expense is recognized yearly.
2. For Lessee (US GAAP):
Under US GAAP, operating leases do not show up on the balance sheet, but lease expenses are recorded in the income statement over the lease term.
Journal Entries:
Lease Payments:
Debit: Lease Expense (Income Statement)
Credit: Cash/Bank (Balance Sheet)
Example:
If a company leases equipment for Tk. 5,000 annually, each year the company would:
Debit: Lease Expense Tk. 5,000
Credit: Cash Tk. 5,000
3.For Lessor (Operating Lease Accounting):
The lessor continues to recognize the leased asset on their balance sheet and records the lease payments as income over the lease term.
Journal Entries:
Debit: Cash/Bank (Balance Sheet)
Credit: Lease Income (Income Statement)
Example:
If the lessor receives Tk. 5,000 annually from a lessee, they would record:Debit: Cash Tk. 5,000
Credit: Lease Income Tk. 5,000
Practical Example:
A company leases an office space for Tk. 20,000 per year for 3 years. The lessee does not own the office, so they treat the arrangement as an operating lease.
At lease start (IFRS 16 approach):
Debit: Right-of-Use Asset Tk. 60,000 (20,000 x 3 years)
Credit: Lease Liability Tk. 60,000
At each payment:
Debit: Lease Liability Tk. 20,000
Credit: Cash Tk. 20,000
Debit: Amortization Expense (for the right-of-use asset)
In Finally:
operating lease accounting focuses on the recognition of lease payments as expenses over the lease term without transferring ownership of the asset from the lessor to the lessee.