Lease Accounting_en

Alazhar University in Gaza

Faculty of Economic and Administrative Science

Accounting Department

Level "4"

Research for:

Lease Accounting

Prepared By:-

Maha Hasona

Doaa Mikky

Supervised By:-

Dr. Emad Abu Sh’aban

A research submitted in partial fulfillment of the requirement of obtaining the bachelor degree of commerce, Accounting Major.

Executive Summary

The Financial Accounting Standards Board (FASB) established principles for lease accounting in its Statement 13, Accounting for Leases, and its numerous amendments. These statements specify the appropriate accounting for leases through their classification as either capital or operating. Governmental Accounting Standards Board (GASB) codification provides that FASB 13 should be the guidelines for accounting and financial reporting for lease agreements, except for operating leases with scheduled rent increases. Scheduled rent increases are increases that are fixed by contract.

Leases should be recorded so that expenditures and future commitments for leases can be reported at fiscal year-end. Assets and liabilities for capital leases defined in this research must be recorded accordingly at the end of each fiscal year.

At present, leasing constitutes a considerable part of firms’ total investments. Whether it is in production enhancing machinery, computer networks, vehicles or office supplies, leasing is a widely used means of acquiring assets.

A distinction is usually made between two different types of leases: operating leases and financial leases (also called capital leases). According to the International Accounting Standards Board (IASB) the substance of a lease transaction determines whether it should be treated as a financial or operating lease. A financial lease is considered to have the economic characteristic of asset ownership. IASB states that a lease that “substantially transfers all the risks and rewards incident to ownership” should be classified as a financial lease. All other leases are classified as operating leases. The classification therefore determines the lease’s accounting treatment (IASB). An operating lease is treated as a rental.

The lessee has the right to use the asset, but the lessor maintains title to the asset. The entire lease payment is reported as an operating expense. An asset acquired through a financial lease is listed on the lessee’s balance sheet and is subject to depreciation expenses. Additionally, future lease payments are listed as liabilities and the interest component of those future payments is, hence, tax deductible.