Lesson 1 of 7 · 12 min
What a lease is and how it is classified
A lease gives the user control of a specific asset for a period in exchange for payments, and it is a finance lease if it looks like buying the asset, otherwise an operating lease.
In short
- A lease conveys the right to use an asset for a period in exchange for payment. The user is the lessee; the owner is the lessor.
- A contract is (or contains) a lease only if it identifies a specific asset, gives the customer largely all the economic benefits from it, and lets the customer direct its use.
- Lessees like leases for low upfront cash, cheap (secured) financing and less ownership risk; lessors earn interest and widen their market.
- A lease is a finance lease if any one of five criteria is met (same under IFRS and US GAAP, same for lessee and lessor); otherwise it is an operating lease.
- Lessees may simply expense payments straight line for leases of 12 months or less (IFRS and US GAAP) and, under IFRS only, for low-value assets (up to about USD 5,000). Lessors get no such exemption.
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