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Lessee accounting - basic approach

The model in the ED, referred to as a 'right-of-use model', reflects that at the start of the lease, a lessee obtains a right to use the underlying asset for a period of time, and the lessor has provided or delivered that right.

This model would be applied to all leases except that for leases of 12 months or less, an entity could alternatively choose for the lease to remain off balance sheet.

Initial measurement

Both asset and liability would be measured initially at the present value of lease payments. Subsequently the accounting for the respective asset and liability follows what is referred to as a dual approach.

The dual approach

This approach reflects a distinction between leases where the lessee pays for the part of the underlying asset, which it consumes or uses up during the lease term (these are referred to in the ED as 'Type A leases'), as compared with a lease for which the lessee merely pays for use ('Type B leases').

In simple terms, the distinction is typically between equipment leases and leases of property.

Leases where the lessee consumes or uses up part of the underlying asset (Type A leases)

This might be the situation for leases of cars, trucks, aircraft, ships and mining equipment. The value of these assets declines over their economic lives, but more so in the earlier years than the later years.

Expenses in the income statement relating to Type A leases would be under two separate expense headings: (1) amortization or depreciation of the right-of-use asset, which would be presented in the same line item as depreciation on assets owned outright; and interest on the lease liability, which would be presented in the same line item as interest on other financial liabilities.

In the statement of financial position, the respective asset and liability would be presented as: Right-of-use asset (within the property, plant and equipment caption); and Lease liability.

Leases where the lessee pays for the use of the underlying asset (Type B leases)

In the case of most property leases, the lessee uses the underlying asset without consuming more than an insignificant part of it.

The lease payments would be recognized on a straight-line basis and presented as a single item on the income statement, as an operating expense (and not split into two items as for Type A leases).

In the statement of financial position, the respective asset and liability would be presented as: Right-of-use asset (within the property, plant and equipment caption); and Lease liability.

Over the period of the lease, the amounts in the statement of financial position would differ as compared with Type A leases, because of the different ways in which the expense items are allocated between different accounting periods.

 
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