Question of the day

In accordance with National Accounting Standards ‘Leases’the lеasing contract is a contract under which the lessor transfers to the lessee, against payment or series of payments, the right to use the asset for an agreed period of time. For the purpose of this Standard, lеasing also includes renting, hiring or hiring.
Depending on the degree to which the lessor and lessee share the risks and rewards of owning the leased assets, two types of lease are distinguished: financial and operational.
The type of lease shall be determined at the beginning of the lease term on the basis of the contractual terms and shall be identical for the lessee and the lessor. In classifying a lease, it is necessary to ensure that content takes precedence over form, i.e. to consider the economic substance of the lease rather than its legal form.

The finance lease requires compliance with at least one of the following conditions:

1) Upon expiry of the lease term, ownership of the leased asset passes to the lessee;
Example 1. Entity ‘A’ has acquired an asset and leased it to entity ‘B’ for 4 years. Under the terms of the contract at the end of the lease term, the lessor will transfer ownership of the asset to the lessee.
Based on the data in the example, leasing is classified as financial.
2) The term of the lease constitutes at least 75 % of the economic life of the leased asset;
Example 2. Entity ‘A’ has acquired an asset and leased it to entity ‘B’ for 4 years. Under the lease, the lessee will return the asset to the lessor at the end of the lease term. The lessor estimates the economic life of the asset at 5 years.
Based on the data in the example, leasing is classified as financial, as the term of the lease is 80 % [(4 years: 5 years) x 100] of the economic life of the leased asset.
3) The sum of the minimum lease payments shall constitute at least 90 % of the fair value of the leased asset.
Example 3. Entity ‘A’ acquired at the beginning of year 201X an asset at fair value of RON 800 000 and leased it to entity ‘B’ for 4 years. Under the lease agreement, the lessee is obliged to:
(a) make an advance payment of RON 30 000 at the start of the leasing term;
(b) make, at the end of each of the first 3 years, payments equal to RON 252 880 and at the end of the year 201X + 3 – payment of RON 252 890 to pay the repayable value of the asset and lease interest at an annual rate of 15 %; and
(c) return the asset to the lessor at the end of the leasing term for an estimated value of RON 84 000.

The lessor estimates the economic life of the asset at 6 years.
Based on the data in the example, leasing is classified as financial, as the sum of the minimum lease payments constitutes RON 1 125 530 (RON 30 000 + RON 252 880 x 3 times + RON 252 890 + RON 84 000), which exceeds the fair value of the asset.
If the lease contains no condition of the above 3 of this Standard, the lease is considered to be operating.
The agricultural land lease contract shall be considered operational.

If the lessor and lessee have agreed to change the terms of the lease in such a way as to change the classification previously made, the revised contract is regarded as a new contract for accounting purposes. Changes in accounting estimates (for example, for economic life, residual value of leased asset) or changes in circumstances (for example, default by a lessee) do not require a revision of the lease classification for accounting purposes.

Source: contabilsef.md