Chart Footnote Lease For Free

When a lease is capitalized, the lessee creates an asset account for the leased item, and the asset value on the balance sheet is the lesser of the fair market value or the present value of the lease payments.

The lessee records the leased right as an item of property, plant, and equipment, which is then depreciated over its useful life to the lessee. The lessee must also record a liability reflecting the obligation to make continuing payments under the lease agreement, similar to the accounting for a note payable.

Leased assets behave like fixed assets, but the business does not have legal ownership of the asset during the lease term. Moreover, leased assets can be finance or operating in nature.

A lease will be recorded on the balance sheet as a right-of-use (ROU) asset and lease liability. The lease liability is the payment obligation over the term of the lease contract, while the ROU asset represents the control of the asset under the lease contract.

Before this new lease standard, the most common assets to be left off the balance sheet were operating leases, because operating leases of any length were not required to be included. Organizations use off-balance-sheet financing because it can positively impact their level of debt and liability.

For example, if a lease payment were for a total of $1,000 and $120 of that amount were for interest expense, then the entry would be a debit of $880 to the capital lease liability account, a debit of $120 to the interest expense account, and a credit of $1,000 to the accounts payable account.

The new lease standard increases the scope and complexity of the financial statement footnote disclosure with additional requirements for both quantitative and qualitative disclosures. While providing useful information, using a spreadsheet to create these disclosures becomes far more difficult than before.

The formula is quite simple ? you just multiply the annual lease payment by the present value factor, and that results in the net present value of future minimum lease payments, which is recorded on the balance sheet as the lease liability (and ROU asset).

Lease payments. As the company receives lease invoices from the lessor, record a portion of each invoice as interest expense and use the remainder to reduce the balance in the capital lease liability account. Eventually, this means that the balance in the capital lease liability account should be brought down to zero.

Lessor Accounting Under an operating lease, the lessor records rent revenue (credit) and a corresponding debit to either cash/rent receivable. The asset remains on the lessor's books as an owned asset, and the lessor records depreciation expense over the life of the asset.