A lease is a contractual financing arrangement in which one party – the lessee – is granted the right to possess and use a specific asset or group of assets owned by another party – the lessor – for an agreed period of time in exchange for periodic rental payment. Leasing can be for the short-term rental of equipment or real estate or the long-term possession and use of leased assets for a fixed period of many years.
The party to a lease that purchases, finances and holds legal title to an asset and grants to another party the right to possess and use the asset over a certain contractual period in exchange for rental payment is the lessor. The party to a lease that selects the asset and receives the right to possess and use the asset from the lessor and owner of the asset over the contractual period of time in exchange for rental payment is the lessee. A lessee is the renter in a rental or operating lease and tenant in a real estate lease.
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The new IASB lease accounting standard (IFRS 16) went into effect for all reporting entities for annual reporting periods beginning on or after 1 January 2019. The new US GAAP lease accounting standard (ASC 842) went into effect for public business entities (PBEs), certain not-for-profits and employee benefit plans for annual periods beginning after 15 December 2018 and becomes effective for all other entities for annual periods beginning after 15 December 2019. Under both new standards, lessees are required to measure and recognize right-of-use assets with a term of 12 months or longer and the resulting lease liabilities on their balance sheets, separately from finance leases.