Companies lease buildings and equipment for their business activities, without incurring the costs of building the equipment itself. These leases last several years and can be classified in two ways, either as capital leases or as leasing transactions. IFRS 16, the new international accounting standard, also requires underwriters to account for a lease debt calculated in present value of expected lease payments and related welfare. Another change for IFRS users is that, unlike U.S. GAAP, all financing leases are classified as lease-financing. IFRS 16 requires a one-time model approach in which the classification of operating capital facility under IFRS 16 is no longer applicable. Capital leasing also has some negatives. As the investment base increases, the efficiency ratio in terms of asset or turnover decreases. And it may not look good for the entity. The Agency`s cost problem is a major drawback of leasing.

In the case of a lease, the lessor transfers all rights to the taker for a specified period of time, resulting in a problem of moral hazard. Since the lessor controlling the asset does not own the asset, the lessor should not be as diligent as if it were his own assets. This separation between the ownership of the asset (lease) and the control of the asset (the reading office) is called leasing agency fees. This is an important concept in leasing accounting. The underwriter first identifies its leases as described above and then determines whether leases should be considered operating or financing criteria on the basis of five criteria for classification of leases. These criteria are similar to the four criteria of the old guidelines, but require a more important assessment, as they do not contain clear lines. A lease agreement that meets one of the following five criteria is considered a lease-financing contract: as explained above, such an asset must, on the whole, be considered a property and a financed asset. To do this, the following steps must be taken before introducing newspaper entries into accounting: interest paid on leasing-related assets – lease payment for the current year – Amortization of leasing assets For how much do we count on the lease debt? How much do we rely on leasing assets? On February 25, 2016, the FASB released a new leasing standard that provides a comprehensive review of financial reporting in this area. The new standard will come into effect from December 15, 2018 for state-owned enterprises, certain non-profit organizations and certain staff performance plans for fiscal years (including interim periods) and for all other businesses, annual periods from December 15, 2019. The standard offers a long transition period; However, it requires businesses to adopt a new retroactive approach where the necessary changes would apply to leases that are in effect at the beginning of the earliest reference period, which will be presented in the annual accounts for the year in which the new standard is adopted. For example, for the three-year calendar year of reference, a public company would retroactively apply the guidelines to its income statement until December 31, 2017. Changing the retroactive approach would not require transitional invoices for leases that expired before the earliest period.

Amortization of leasing assets – value of debt of lease payments / No. Let`s take the example of a company called ABC Ltd that recently entered into a lease agreement with a company called XYZ Ltd for certain specialized computer equipment for a 2-year lease that includes the payment of $20,000 at the end of the first year and $24,000 at the end of year 2. The current value of the minimum rental payments is $35,000, while the fair value