Accounting Treatment in the Books of Lessee

Accounting Treatment in the Books of Lessee : In today's business environment, leasing assets is common for companies seeking to conserve capital and maintain flexibility. Whether leasing real estate, vehicles, equipment, or other property types, proper accounting treatment is essential to reflect these transactions in financial statements accurately. With the introduction of standards like IFRS 16 and ASC 842, the Accounting Treatment in the Books of Lessees has become more standardised, requiring lessees to recognise both right-of-use assets and lease liabilities on their balance sheets.

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Accounting Treatment in the Books of Lessee

Accounting Treatment in the Books of Lessee Format

What is a Lease?

Royalty Meaning in Accounting

Parties in Royalties Accounting

1. Lessor

• Determines the terms and conditions of the royalty agreement.
• Receives royalty payments from the lessee.
• Records royalty income in their financial statements.

2. Lessee

• Makes royalty payments to the lessor as per the agreement.
• Accounts for royalty expenses in their financial statements.
• Manages any obligations related to minimum rent and short-workings.

3. Author

• Enters into a royalty agreement with the publisher.
• Receives royalty payments based on the agreed percentage of book sales.
• Manages personal accounting for received royalties.

4. Publisher

• Calculates and disburses royalty payments to the author.
• Keeps accurate records of sales and royalty payments.
• Reports royalty expenses in their financial statements.

5. Licensee

• Makes royalty payments to the licensor as per the agreement.
• Accounts for the royalty expenses in their financial statements.
• Ensures compliance with the terms of the license agreement.

6. Licensor

• Determines the terms of the license agreement.
• Receives royalty payments from the licensee.
• Records royalty income in their financial statements.

7. Mining Company

• Pays royalties to the lessor based on the amount of resource extracted.
• Accounts for royalty expenses in their financial statements.
• Manages obligations related to minimum rent and short-workings.

Initial Recognition and Measurement

• Initial Measurement : The ROU asset is measured at cost, which includes:
  • The initial measurement of the lease liability
  • Any lease payments made at or before the commencement date, less any lease incentives received
  • Any initial direct costs incurred by the lessee
  • An estimate of the costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located, or restoring the underlying asset to the condition required by the terms and conditions of the lease.

• Initial Measurement : The lease liability is measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee's incremental borrowing rate.

1. Initial Recognition :
   • ROU Asset : The ROU asset includes the present value of lease payments plus any initial direct costs.
   • Lease Liability : The present value of the lease payments is calculated using the incremental borrowing rate.

1. Subsequent Measurement :
   • ROU Asset : Depreciated over five years on a straight-line basis.
   • Lease Liability : Interest and lease payments are accounted for annually.