The equipment (personal property) or real estate (real property) that is the subject of a lease and currently leased is a leased asset. In general, any identifiable, tangible and nonconsumable asset to which title can be held can be leased. Leasing is typically classified by the nature of the asset leased as either equipment leasing, including the leasing of vehicles, or real estate leasing.
Lease Assets = Right to Possess and Use Personal or Real Property
The accounting and tax treatment of equipment leasing is determined by the nature of the contractual arrangement between the owner and user of the leased assets. Leasing practices and classification for tax and accounting purposes vary widely from country to country and depend primarily on the local legal, tax, accounting and regulatory conventions.
IFRS lease accounting applies to licensing agreements for such intangible assets as motion picture films, patents and copyrights and rights to explore for or exploit (deplete) natural resources if rights are established for the exclusive use of the asset. Lease accounting under US GAAP standard (ASC 842) applies to only tangible fixed assets (property, plant and equipment), excluding natural resources.
| Conventional Lease Classification | ||
|---|---|---|
| Characteristic | Finance/Capital Lease | Operating Lease |
| Economic Ownership | Lessee | Lessor |
| Financial Substance | Secured financing transaction/loan | Lease |
| Balance Sheet Treatment | Shown in the balance sheet of both the lessor and the lessee | Shown in the balance sheet of only the lessor, not the lessee |
| Lessee Tax Treatment | Depreciation and interest expense | Rental expense |
| Risks and Benefits | Transferred to the lessee | Retained by the lessor |
| Lease Period | ≥ 75% of the asset’s economic life | < 75% of the asset’s economic life |
| Ownership at Termination | Transferred to lessee upon last lease payment | Purchase by lessee at market value |
| Suitability for Lessee | Where lessee intends to become the asset’s owner | Where lessee does not want to ultimately own the leased asset |