Leasing elements

  • 5 minutes

The following diagram shows the elements of the business process for leases.

  • IFRS - International Financial and Reporting Standards
  • GAAP - Generally Accepted Accounting Principals

Diagram of the elements of the business process for leases.

A leased asset contains the following components:

  • Lease agreement - The lessor who owns the asset and agrees with the lessee to contract the asset for a defined time in return for annual lease payments. In addition to the formal relationship between the lessor and the lessee, the leasing agreement involves management decisions, such as the possibility of a rental option and the transition of ownership.

  • Lease calculation and classification per accounting standard - Identifies the accounting standard that will be applied in the initial and subsequent calculation and the classification test that determines what the lease type will be. The lease types are:

    • Finance lease - Risks and rewards that are related to the leased asset are transferred to the lessee.

    • Operating lease - Risks and rewards that are related to leased asset remain with the lessor.

  • Thresholds - Used in the lease classification tests to determine if the asset is classified as one of the following types:

    • Lease term - The percentage of useful life to be used in the classification test. The system will classify the lease as finance if the lease type is set to Automatic and if the lease term over the asset’s useful life is greater than or equal to the percentage that is defined in this classification.
    • Present value - The percentage of the asset’s fair value to be used in the classification test. The system will classify the lease as finance if the lease type is set to Automatic and if present value of future lease payments over the asset’s fair value is greater than or equal to the percentage that is defined in this classification.
    • Short-term lease - If the lease term is less than or equal to the defined value, the lease will be classified as a short-term lease.
    • Low value lease - If the asset fair value is less than or equal to the defined value, the lease will be classified as a low-value lease.
    • Lease classification and transactions - The lease classification is an automated process to classify the leases based on the defined thresholds in books, alongside other classification test criteria, to identify if the lease is a finance lease, operating lease, short-term lease, or low value lease.