Accounting For Finance Lease

In The Books of Lessee

• At the inception the lessee should recognize the lease as an asset and a liability at an amount equal to the fair value of the leased assets.

• The liability for a leased asset should be presented separately in the balance sheet as a current liability or a long term liability

• Initial direct costs like commission and legal fee incurred in connection with leasing activities to be recognized as part of the leased asset

• Lease payments should be apportioned between the finance charges and the reduction in the outstanding liabilities

• The depreciation expense should be allocated over the period of the lease similar for assets which are owned.

In The Books Of Lessor

• The lessor should recognize assets under a finance lease in the Balance Sheet as a receivable at an amount equal to the net investment in the lease.

• The recognition of finance income should be based on a constant rate of return on the net investment.

• Initial direct costs like commissions and legal expenses to be debited either immediately in the Income Statement or allocated against the finance income over the lease term.