1. What is Lease? and How can you identify a lease?

A lease is a contract, or part of a contract, that conveys the right to use an asset (the
underlying asset) for a period of time in exchange for consideration. If a contract contains a
lease, then it will generally be on-balance sheet for the lessee. A lease is defined as a contract
that conveys to the customer the right to use an asset for a period of time in exchange for
consideration. A lease exists when a customer controls the right to use an identified item, which
is when the customer; has exclusive use of the item for a period of time; and can decide how to
use it. ​A lease is a legal agreement by which the owner of a specific asset (lessor) allows a
second party (lessee) to use the asset for a specific period in exchange for periodic payments to
the lessor. These periodic payments are called lease rentals​. The first thing you need to determine
when identifying if a lease exists in a contract is if the contract conveys the right to control the
use of identified property, plant, or equipment (an identified asset) for a period in exchange for
consideration. It does not sound as though you have the right to control the use of the asset, so I
would suggest you do not have an embedded lease in this case.

2. Differentiate Right to obtain economic benefits from use and Right to direct the use
of an asset.

Right to obtain substantially all of the economic benefits is ​to control the use of an
identified asset, a customer is required to have the right to obtain substantially all of the
economic benefits from use of the asset during the period of use. The most obvious way of
obtaining substantially all of the economic benefits from use of the asset is having exclusive use
of the asset during the period of its use (IFRS 16.B21-B23).The lessee should focus on economic
benefits arising from the use of the asset (e.g. obtaining products), not from the ownership of the
asset (e.g. tax credits) (IFRS 16.BC118). While the ​Right to direct the use ​the customer has the
right to direct the use of an identified asset during the period of use only if either (IFRS 16.B24) ;
the customer has the right to direct ​how and for what purpose the asset is used during the period
of use; or the relevant decisions about how and for what purpose the asset is used are
predetermined​.

3. How do you account for leases on the part of the lessee?

Although the new standard retains the existing model of having two types of leases,
operating ​and ​finance​, the lessee’s burden for recognition and measurement is increased. Under
the old guidance, operating leases were not recorded on the balance sheet; therefore, many
entities did not evaluate leases embedded in service agreements or other short-term leases that
were known to be operating leases. Under the new guidance, an operating lease must be
measured as a liability on the balance sheet, and thus the cumulative effect of the free postage
meters, if meeting the definition of a lease, might be material to the financial statements and
require identification, recognition, and measurement of a new liability.

A lessee uses the leased asset and makes regular payments to the lessor. The accounting and
reporting of different leases are done as follows:

The finance lease is reported by the lessee as follows on different financial statements:

❏ Balance Sheet: Both leased asset and lease payable (liability) is reported. The value
reported is lower of the present value of the lease payments in future or the leased asset’s
fair market value.
❏ Income Statement​: The interest expense on the lease payable is reported. It is calculated
on the lease payable at the beginning using the implied interest rate in the lease.
Generally, the interest rate used is lower than the borrowing rate of a lessee and the
implicit rate of a lessor. If the leased asset is depreciable, then a ​depreciation expense is
also reported as with any other asset.
❏ Cash Flow Statement​: Under U.S.GAAP, the interest component of the ​lease payment is
reported as an operating cash outflow. And the principal repayment component that
reduces the lease payable is reported as a financing cash outflow. Under IFRS, the
interest expense can be reported either as an operating cash outflow or financing.

Accounting for Operating Lease by Lessee

The operating lease is reported by the lessee as follows on different financial statements:

❏ Balance Sheet: Neither an asset nor a liability is reported.

❏ Income Statement: The asset’s rent is expensed which is the same as the lease payment.
❏ Cash Flow Statement: The complete lease payment or the rent expense is reported as
operating cash outflow.