Finance lease vs Operating lease under MPERS Section 20

What is Lease?

An agreement stated the transfer of an asset with the right of use by a lessor to a lessee.

There are two types of leases which are

- Finance lease

- Operating lease

Differences between a finance lease and an operating lease?

Classification of Finance lease:

- Ownership of the asset will be transferred to the lessee by the end of the lease term.

- Lease term is for the major part of the useful life of the asset even if the title is not transferred.

- Lessee has the option to purchase the asset at a lower price compared to the fair value.

- Present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.

- Leased assets have specialised nature that only the lessee can use without major modifications.

Classification of Operating lease:

- Lease does not transfer substantially all risks and rewards incidental to ownership.

Recognition and measurement for a lessee - Finance lease

Statement of Financial Position – Assets and Liabilities

- Recognise as assets and liabilities at amounts equal to:-

o the fair value of the assets; or

o if lower, the present value of the minimum lease payments

- Initial direct costs of the lessee are added to the amount recognised as an asset

- Using the effective interest method to reduce the outstanding liability

Statement of Comprehensive Income - Expenses

- Depreciate the asset according to lease term or useful life

- Finance charges of each period during the lease term

Operating lease

- Recognise lease payments as an expense over the lease term on a straight-line basis

Disclosure for lessee

Finance lease

- Carrying amount of the asset

- Amount of future minimum lease payment.

i) Not later than one year

ii) Later than one year and not later than five years

iii) Later than five years

Operating lease

- Amount of future minimum lease payment under non-cancellable operating leases ：

i) Not later than one year

ii) Later than one year and not later than five years

iii) Later than five years

- Lease payment is recognised as an expense.

Source:

MPERS 20 Leases

https://bit.ly/3wEJJXO

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AccountKtp KtpMay 25, 2022finance lease, operating lease, accounting for lease, mp, MPERS 20

Finance lease vs Operating lease under MPERS Section 20

Finance lease vs Operating lease under MPERS Section 20

What is Lease?

Differences between a finance lease and an operating lease?

Recognition and measurement for a lessee - Finance lease

Operating lease

Disclosure for lessee

Source:

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