Today we will talk about what an operating lease is, as this information will be useful to all novice investors.
Statistics show that more than 30% of fixed assets of domestic enterprises are used on the basis of lease agreements.
Modern economic literature distinguishes four main varieties:
- Financial.
- Operating room.
- Combined.
- Returnable.
The term “operating lease” usually means the transfer of assets to third parties for their use. A key feature of an operating lease is that the owner of the assets continues to maintain them after transferring them to third parties.
One of the first companies to widely practice operating leases was IBM. This organization began leasing office equipment and computers to various companies.
Assets that require regular maintenance during operation are optimally suited for operating lease. Maintenance. Among similar assets special attention deserves automobile transport, various types of engineering equipment, etc.
When leasing assets for operating lease, their owner assumes obligations for them service. It should be noted that the rental payments initially include the price of periodic maintenance of the assets that are leased.
Operating lease. Peculiarities
Among key features Operating leases require special attention to the incomplete depreciation of leased assets.
This is due to the fact that objects are leased for a significantly shorter period of time than the service life established by the manufacturer. For this reason, rental payments are not able to cover full price assets that are leased.
To cover emerging costs, the lessor can use one of several available methods. The most common method involves renewing lease agreement or leasing the asset to another lessee. Alternatively, the owner can simply sell the asset after the lease ends.
A standard operating lease agreement provides that the lessee has the right to terminate it early. It is the presence of this clause that distinguishes an operating lease agreement from others.
Also, when drawing up an operating lease agreement, it is mandatory to take into account the risks that may be caused by the obsolescence of the asset or its downtime due to changes in the current market conditions.
All risks that arise when concluding an operating lease agreement are borne by the lessee along with the equipment that he leases. This is exactly what it consists of key difference between operating and finance leases.
Reflection of operating leases in accounting
When preparing an accounting report, payments for the described type of lease are recorded as deferred expenses for the lessee, as well as deferred income for the owner of the asset.
According to the current legislation, lease payments are expenses, which allows them to be written off. In accounting write-off rental payments performed on a straight line basis.
A striking example of an operating lease is renting out office premises V various types shopping centers. In this case the owner shopping center undertakes to maintain the leased premises in proper technical condition.
Another example of such a rental is the rental of an existing residential real estate.
It should be remembered that a fairly common type of operating lease is a leaseback. This term usually means a situation where the owner sells an existing asset. The seller then leases the sold asset from the buyer.
The IFRS standard will be edited very soon. After this standard is amended, the term operating lease will completely disappear from domestic legislation.
It should be noted that an operating lease differs from a financial lease only in the terms of the agreement concluded.
I hope this material has helped you understand what an operating lease is, as well as what the main features of this term are.
If you are interested in investing in different kinds commercial real estate for the purpose of its subsequent rental, then knowledge about the features of operating leases will be useful. Renting out existing property for operating lease is quite effective method receiving income.
Operating lease or operating leasing - English Operating Lease, is an agreement that allows a tenant to use the property for the short term without obtaining title. An example of an operating lease would be the lease of commercial real estate by a business owner, the lease of an aircraft by an airline, or the lease of industrial equipment by manufacturers. There are many reasons to choose an operating lease over other types of leases or outright purchase of an asset.
In the case of an operating lease, the term of the agreement is usually significantly shorter than the useful life of the leased property. This type of lease is ideal for tenants who need to use a property without purchasing it. Owning property usually comes with many responsibilities and risks that may be unacceptable. An operating lease provides much greater flexibility, which can be very beneficial to the lessee, and a well-drafted lease can reduce the cost of doing business.
The opposite of an operating lease is a financial lease, the agreement of which involves a partial transfer of ownership. There are several criteria that allow a lease to be classified as a finance lease. However, it should be noted that these criteria are different countries are established by law and can vary significantly. For example, in the USA the agreement finance lease must meet four main criteria:
- the agreement must provide for the lessee's right to take ownership of the asset at the end of the lease agreement;
- the redemption price must be lower than the current (at the time of expiration of the contract) fair market price asset;
- the contract duration must be at least equal to 75% of the expected useful life of the asset;
- the total amount of all lease payments must be at least 90% of the original amount paid by the lessor upon acquisition of the asset.
Also, finance and operating leases are reflected differently in financial and tax reporting, and in other financial statements. financial information. Because these differences are significant, in many countries the criteria for classifying an agreement as an operating or finance lease are clearly defined by law. This is especially important for publicly traded companies, since their reputation depends on the cleanliness and transparency of their financial statements.
The terms of an operating lease can vary significantly, so careful review and evaluation of the terms is extremely important for any lessee. If the parties have disagreements regarding the terms, or they consider some of the language in the operating lease agreement to be incorrect, they must resolve these differences before the agreement is signed and the parties assume certain obligations. The fact that an agreement has been signed makes it much more difficult to challenge its terms, which can lead to losses for both the tenant and the landlord.
RENTAL AS A SOURCE OF FINANCE
Fixed assets, the valuation of which is reflected in companies' financial statements, most often belong to them as property rights. However, the main thing is not to own, but use effectively these funds. One way to acquire assets for later use is to purchase them; Another alternative option is rent (leasing). Until the 1950s the concept of rent was associated mainly with real estate, i.e. land and buildings. Today, almost any type of asset can be leased, with about 30% of new fixed assets purchased by companies using lease agreements.
Types of rental
The main types of lease include: 1) operating, 2) financial, or capital, 3) return, 4) combined.
Operating lease
Operating lease(operating lease), sometimes called service, suggests how financing, so and Maintenance asset. IBM was one of the pioneers of such operations: computers and printing equipment, cars and trucks are the main objects of operating lease. The owner of the property is called landlord(lessor), user - tenant(lessee). Typically, these leases make the lessor responsible for maintaining the leased equipment, and the cost of maintenance is often included in the lease payments.
Another important characteristic of an operating lease is non-sexnaya depreciation. The payments required under the lease agreement are not sufficient to cover the full cost of the equipment. The equipment is leased for a period significantly shorter than its expected service life, and therefore the lessor intends to cover all of its costs either by renewing the lease, entering into a new lease, or by selling the equipment.
The final feature of an operating lease is the lease clause. cancellation, giving the lessee the right to terminate the lease agreement and return the equipment before the end of the main contract. This is an important consideration for the lessee, as equipment may be returned if it is technologically obsolete or no longer needed due to a decline in the lessee's business.
Financial or capital lease
Finance lease(financial lease), sometimes called capital(capital), differs from the operating room in that: 1) does not imply maintenance by the lessor, 2) Not subject to cancellation and 3) preprovides full depreciation of the asset (the lessor receives rental payments equal to the full price of the leased equipment plus some income). Based standard contract the tenant selects suitable conditions, agrees on the price and delivery time with the manufacturing supplier, then agrees that the leasing company buys the equipment from the manufacturer or distributor, and at the same time draws up an agreement to lease the equipment. The terms of the lease provide for full amortization of the lessor's investment, as well as a required return on the outstanding balance assumed at interest rate, which the tenant would pay on a term loan. For example, if the rate on a term loan is 10%, approximately the same return is provided for in the lease agreement.
The tenant receives the right to extend the lease at a reduced rate. The lease cannot be canceled until the tenant has paid in full. Because the lessor receives an income that exceeds the investment in the equipment, this type of lease is often called net lease (“net, net” lease).
IFRS 17 LEASES
This standard regulates the accounting procedure and reporting of business transactions under lease agreements by lessors and lessees.
When classifying a lease, the key point is to determine whether all significant benefits and risks can be transferred from the lessor to the lessee. Rent is divided into two types:
· financial,
· operating room.
Finance lease is a lease in which all the risks and rewards of the leased asset are transferred from the lessor to the lessee upon entering into a lease agreement (for example, leasing). Typically, a finance lease has the following characteristics:
· by the end of the lease term, the tenant becomes the owner of the leased property;
· the lessee has the right to subsequently repurchase the leased asset at a price below its fair value;
· the lease term constitutes the majority of the economic use period of the leased property;
· at the date of lease acceptance, the discounted value of the minimum lease payments is close to fair value;
· leased assets are specific property that only the lessee can use without significant modifications.
Operating lease– a lease in which all the risks and rewards of the leased asset are not transferred from the lessor to the lessee.
When classifying a lease, it is necessary to be guided by the economic content of the transaction, and not by the form of the agreement. Classification of a lease occurs at the moment all risks and rewards pass, i.e. upon acceptance of the lease. If, during the validity of the lease agreement, the parties decide to reconsider the type of lease, then it is necessary to conclude new agreement with a changed type of lease. When revising estimates (service life, salvage value, etc.), a new contract is not required.
Features of the classification of lease of land and buildings.
Land leases are generally classified as operating leases unless there is provision for a transfer of ownership from the lessor to the lessee at the end of the lease term. When leasing land plots and buildings, they are considered as individual elements, since the type of lease in this case may be different for the land plot and for the building. When classifying a lease, the land and building may be treated as one, provided that the initial cost of the land is not significant. In this case, the economic life of the buildings is equal to the economic life of the entire leased asset. Separate measurement of land and building leases is also not required when the lessee uses the leased property as an investment property and uses the fair value model.
LEASE IN THE FINANCIAL STATEMENTS OF THE TENANT.
Finance lease.
Initial recognition. At the beginning of the lease term, lessees are required to recognize finance leases as assets and liabilities on the balance sheet in the amount of the lesser of:
· fair value of the leased property;
· discounted value of minimum lease payments.
When calculating present value, the interest rate included in the lease is used as the discount rate, and if this cannot be determined, then the interest rate on the lessee's borrowed capital should be used.
Follow-up assessment. Minimum lease payments are allocated between finance payments and liability reductions. Financial payments are distributed over periods in such a way as to obtain a constant interest rate on the remaining balance of obligations.
Example:
The management of the enterprise decides to conclude a leasing agreement for the purchase of a set of office equipment. The cost of the kit on the date of conclusion of the leasing agreement is RUB. According to the terms of the agreement, 12 payments of 50,000 rubles each are provided. at the end of every month. The annual interest rate on a bank loan is 10%
Fair value of the leased asset = RUB 500,000.
The discounted value of the minimum lease payments is determined as follows:
, n=12
Month | Discounted payment, rub. |
49588,41615 |
|
49180,22032 |
|
48775,38462 |
|
48373,88141 |
|
47975,68324 |
|
47580,76291 |
|
47189,09343 |
|
46800,64805 |
|
46415,40023 |
|
46033,32364 |
|
45654,39219 |
|
45278,57997 |
|
Sum |
The discounted value of the leased asset is approximately 568,845 rubles, and the fair value is 500,000 rubles, since the lower of the values is accepted for inclusion on the lessee’s balance sheet, the book value of the asset is 500,000 rubles.
Lease payments =50,000*12=600,000 rub.
Asset price = RUB 500,000.
Interest accrued for the entire period of the agreement = RUB 100,000 (600,000)
Distribution of interest payments (cumulative method):
Period | Proportion, weight/distribution proc. payments | Percentage component interest to accrued for the entire period*proportion | Basic payment monthly payment - interest. composed |
|
15384,62 | 34615,38 |
|||
14102,56 | 35897,44 |
|||
12820,51 | 37179,49 |
|||
11538,46 | 38461,54 |
|||
10256,41 | 39743,59 |
|||
41025,64 |
||||
42307,69 |
||||
43589,74 |
||||
44871,79 |
||||
46153,85 |
||||
48717,95 |
||||
Sum |
In the example presented, the calculated principal payment reduces the amount of finance lease obligations, and the interest component is the interest (financial) expense of the enterprise.
Finance leases incur depreciation and finance costs. The depreciation policy for assets under finance lease must be consistent with that adopted for owned assets. If the lessee does not take possession of the asset at the end of the lease term, it must be fully depreciated at the end of the lease term.
An entity shall apply IAS 36 Impairment of Assets to assets under finance leases.
Information disclosure.
Ø for each asset class – net book value;
Ø the total amount of minimum lease payments and their discounted value for each of the following periods:
· no later than one year;
· after five years;
Ø contingent rent recognized as an expense in the reporting period;
· availability and conditions of options;
Operating lease.
Lease payments should be recognized as expenses spread evenly over the lease term.
Information disclosure.
Tenants must disclose the following information:
Ø the total amount of minimum lease payments for each of the following periods:
· no later than one year;
· after one year, but not later than five years;
· after five years;
Ø the total amount of expected minimum sublease payments;
Ø lease and sublease payments recognized as an expense for the period, separately identifying minimum lease payments, contingent rent and sublease payments;
Ø general description significant contracts lease entered into by the tenant, including, but not limited to, the following information:
· the basis on which the contingent rent is determined;
· availability and conditions of options;
· restrictions established by lease agreements.
LEASE IN THE FINANCIAL STATEMENTS OF THE LESSOR.
Finance lease.
Initial recognition. Lessors are required to recognize assets held under finance leases on their balance sheets as receivables in an amount equal to the net investment in the lease. The lessor's initial direct costs (fees, legal and internal fees) are included in the finance lease receivable and reduce the amount of income recognized over the lease term.
Costs borne by lessors, which in finance leases usually coincide with the start of the lease term.
Follow-up assessment.
In a finance lease, substantially all of the risks and rewards of ownership of the asset are transferred to the lessee, and the lease payments receivable are shown by the lessor as repayment of principal and interest (finance) income. Recognition of finance income should be based on a schedule that reflects a constant rate of return on the lessor's net outstanding investment in the finance lease (see example).
Landlords. Sales revenue recognized at the beginning of the lease term by the manufacturer or dealer is equal to the lesser of fair value or the present value of the minimum lease payments.
Information disclosure.
Tenants must disclose the following information:
Ø A reconciliation between the gross rental investment and the present value of the receivables. In addition, the total gross investment in the lease and the present value of minimum lease payments receivable must be disclosed for each of the following periods:
· no later than one year;
· after one year, but not later than five years;
· after five years;
Ø lost financial income;
Ø non-guaranteed liquidation value accumulated for the benefit of the lessor;
Ø accumulated valuation reserve to cover outstanding debt on minimum lease payments;
Ø conditional rent recognized as income;
Operating lease.
Lessors must report assets under operating leases on their balance sheets in accordance with the nature of the asset.
Costs, including depreciation, incurred in obtaining rental income are included in expenses, and rental income is recognized evenly over the lease term. Initial direct costs must be included in the carrying amount of the leased asset and recognized as an expense over the lease term.
The depreciation policy for leased assets must be consistent with that adopted for all other similar assets. In addition, leased assets must be tested for impairment in accordance with IAS 36 Impairment of Assets.
Information disclosure:
Tenants must disclose the following information:
Ø future minimum lease payments in aggregate and for each of the following periods separately:
· no later than one year;
· after one year, but not later than five years;
· after five years;
Ø total conditional rent;
Ø general description of significant lease agreements.
SALE AND LEASEBACK TRANSACTIONS
If a sales transaction with leaseback involves a finance lease, the excess of revenue over the carrying amount is not immediately recognized as profit in financial statements seller-tenant. Instead, it must be carried forward and amortized over the lease term.
If a sale and leaseback transaction results in an operating lease and the property is sold at fair value, a gain or loss on sale is recognized.
Fair value is the value of an asset or liability in a market among knowledgeable willing participants who are independent of each other.
Investment property is property that is at the disposal of the owner (lessee under a finance lease) for the purpose of receiving rental payments or income from capital gains.
The interest rate implicit in the lease is the rate at which, at the date of lease acceptance, the present value of the minimum lease payments and the portion of the asset's salvage value that is not guaranteed to the lessor equals the fair value of the leased asset.
Contingent rent is a part of rental payments that is not fixed in the contract as a specific amount, but is based on the future value of a factor, the change of which is not associated with the passage of time (sales volume, volume of use, price indices, market interest rate)
Net investment in a lease is the combination of the minimum lease payments and the portion of the salvage value not guaranteed to the lessor, discounted at the interest rate specified in the lease agreement.
Gross investment in a lease is the combination of the minimum lease payments and the portion of the salvage value not guaranteed to the lessor.
Lost financial income is the difference between the gross and net rental investment.
Pavel Anikin, Audit Director of CJSC RUFAUDIT, member of the RCA, certified practicing accountant (CA P)
When accounting for rent both in Russian and international standards Financial services of companies have many questions. How to classify it? Who should reflect the property on its balance sheet - the lessor or the lessee?How to distribute income and expenses between reporting periods? In this article we will look at the differences in approaches to solving these problems that IFRS and RAS offer.
Lease: operating or financial?
In order to correctly reflect a lease agreement in accounting, it is first necessary to find out what type of lease it is: operating or financial, that is, leasing. Let's start with Russian legislation. To answer this question you need to contact Federal law
dated October 29, 1998 No. 164-FZ “On financial lease (leasing)” (hereinafter referred to as the Leasing Law). According to it, the contents of the leasing agreement should be as follows. The lessor acquires ownership of the property chosen by the lessee from a specific seller. The lessor must provide the tenant with this property for temporary possession and use for a fee. Respectively, rental relations
under such agreements they are classified as leasing. All the rest must be taken into account as other rent, that is, operating rent. Thus, leases are classified solely depending on how the agreement is drawn up.
Please note: the manufacturer cannot act as a lessor in relation to its own products.
In turn, IFRS divide leases into financial and operating leases depending on the economic content of the transaction. The first step is to find out who bears the risks associated with owning the asset and benefits from its use.
IFRS offers 5 criteria that can be used to determine whether the risks and economic benefits associated with the leased asset have actually transferred from one partner to another:
1. By the end of the contract term, the lessee becomes the owner of the asset. Since the property will remain with the lessee for its entire useful life, the risks and rewards will pass to him.
2. At the end of the lease term, the lessee has the right to purchase the asset at a price that is significantly lower than its fair value at the time of such transaction. At the same time, even when concluding a lease agreement, the tenant must be sure that the property will be sold to him. That is, at the end of the lease period, ownership of the asset must pass to the lessee, although this is not subject to the obligations of the parties to the agreement.
3. The lease term represents a significant portion of the useful life of the asset.
In this case, ownership of the property may not pass to the tenant.
But since he will use the asset for most of its useful life, he will also reap most of the economic benefits.
Note that IFRS does not establish clear criteria by which to determine what part of an asset's service life is significant. In practice, 75 percent is usually used. However, do not forget that this is only an approximate value. It does not always indicate that the lease should be classified as financial.
4. The discounted value of lease payments on the date of signing the contract is equal to the fair price of the asset or constitutes a significant part of it (in practice, the figure is 90 percent). That is, in the described situation, the tenant actually buys the property with an installment plan.
5. The property is such that only the tenant may use it without significant modification.
So, the lease is classified. If this is an operating lease, then the differences in accounting under RAS and IFRS will be insignificant. But the accounting rules for finance leases are fundamentally different.
Balance dispute
In accordance with IFRS requirements, if a lease is classified as a finance lease, then the lessor must write off the property from its balance sheet. The tenant must take into account his own valuables. In Russian accounting, the asset may remain on the lessor’s balance sheet by agreement of the partners. In this case, the lessee will account for such property in an off-balance sheet account.
Accounting for a finance lease by a lessee...
1. Initial recognition. At the beginning of the lease period, the lessee needs to show the received assets and resulting liabilities on its balance sheet. In general, property is measured at fair value. If it turns out to be more than the discounted amount of the minimum lease payments, an entry is made in accounting for the amount rent
. That is, property is reflected at the lower of two estimates (the principle of conservatism).
The present value of the minimum lease payments is determined based on the interest rate included in the lease. The latter is also called the implied rate - the one that the lessor used when calculating lease payments.
Of course, in most cases it is not known to the tenant. Then you need to use the interest rate of a bank loan, the payment schedule for which would correspond to the terms of the leasing agreement.
If the discounted value of the minimum lease payments is less than the fair price of the property, it must be increased to the latter value.
2. All initial expenses of the tenant will be included in the amount at which he will accept the property for accounting. The rules for recording finance leases in Russian accounting are different. Thus, if, according to the terms of the agreement, the lessee must accept the leased asset on its balance sheet, it will take it into account at the nominal amount of lease payments. That is, RAS does not take into account the time value of money.
In IFRS, the lessee shows its obligations to the lessor also at nominal value. But at the same time, he introduces an additional account, which reflects the amount of future interest expenses. As a result, the discounted amount of debt will appear on the balance sheet.
According to IFRS, the lessee must depreciate the leased assets according to the rules that it applies to similar property. However, he cannot establish accelerated depreciation.
Interest expense for the use of leased property is reported using the effective interest method 1, similar to interest on the company's long-term liabilities. But in Russian accounting, interest expenses are not shown.
Rental costs will consist either exclusively of lease payments (when accounting for property with the lessor), or from accrued depreciation (when accounting for the lessee).
1. Initial recognition....and the landlord If the lessor is not the manufacturer or dealer of the leased property, then when the asset is transferred to it, it must recognize a “receivable” on its balance sheet. The rules for its assessment are the same as for the tenant's debt: the total amount must be shown at nominal value. It is also necessary to enter an additional account to account for future interest income. As a result, the balance sheet will contain the current value of the debt. These are the requirements of IFRS. Concerning
2. Russian accounting, then receivables are reflected in full amount, that is, at their nominal value.
Revenue recognition.
Under international accounting standards, both the lessor and the lessee must record interest income over the entire term of the lease agreement. Moreover, they need to do this systematically and rationally. The constant rate of return is distributed among the lessor's net outstanding investment in the lease. The latter represent the difference between the nominal amount of debt and the amount of interest income not yet received. Thus, we are talking about the same effective interest rate method.
3. According to RAS rules, the lessor can reflect income in two ways. The choice between them depends on which of the partners accounts for the property on their balance sheet - the lessor or the lessee. In the first case, the lessor’s income will be the amount of lease payments under the agreement.. There is another important difference between IFRS and RAS. It is associated with the so-called trade lease. They talk about it when the seller of the property acts as a lessor. That is, when renting is essentially an alternative to purchasing an asset. In such a situation, IFRS requires the lessor to divide its income into two types:
- profit or loss that is equivalent to the proceeds less expenses from the sale of the leased asset at market prices taking into account all discounts - on the date of reflection in the accounting of rental property;
- interest income – throughout the entire lease term.
Thus, Russian rules Accounting for finance leases differs significantly from international ones. Primarily due to the fact that the accounting procedure is largely determined by the characteristics of a particular transaction, that is, the terms of the leasing agreement. When accounting for this type of lease under IFRS, it is necessary to observe the principle of priority of the economic content of the agreement over its form. Differences in accounting for finance leases are also due to the fact that RAS does not have the concept of time value of money. Therefore, domestic companies cannot distribute interest income and lease expenses evenly based on the effective interest rate.
Differences in lease accounting according to Russian and international standards
The procedure for recording |
||
| Rental classification | Based on the terms of the contract | Depends on the economic content of the transaction |
| Accounting for leased property on the balance sheet of the lessor or lessee | Specified in the contract | The lessee always accounts for the asset on its balance sheet |
| Accounting for the transfer of property from a tenant | Based on the nominal amount of lease payments on the balance sheet or on an off-balance sheet account | Based on the lower of fair value or discounted value of lease payments. |
| Reflection of expenses by the tenant | Costs consist of either lease payments or depreciation of the asset (accelerated depreciation is allowed) | Property is depreciated according to general rules. |
| Interest expense is recorded based on the effective interest rate | Accounting for the transfer of property from the lessor | Shows the discounted value of receivables |
| Reflection of income by the lessor | In accordance with the terms of the agreement | Based on effective interest rate |
| Trade lease accounting | There is no concept of trade lease | In addition to interest income, profit or loss from the sale of an asset is taken into account. |