Accounting for Lease:

Lessor’s
Point of
View
Anne Johnette Aguilar
Lessor’s POV

• A lessor shall classify each of its

leases as either an operating lease
or a finance lease.
In classifying
leases, the lessor
considers the
following criteria:
Major Criteria
- to be used by
the lessor 1) Transfer of ownership
2)Bargain purchase option.
3)Major part of the economic life
4)Substantially all of the fair value
of leased asset
Note:
• Under criteria 1 and 2, the leased
asset will not revert to the lessor at
the end of the lease term. Under
criteria 3 and 4, the asset reverts to
the lessor at the end of lease term.
Other Criteria -
Indicators of a 1) Specialized nature
finance lease 2)Losses are borne by the
lessee
3)Gain or losses from
changes in fair value accrue
to the lessee
4)Extension of lease term at
the option of the lessee
ACCOUNTING FOR OPERATING LEASE

• Below table summarizes the accounting treatment for items related to operating
leases
• Payments Made by Lessee
Periodic Rental Rental Income
Unequal Rental Payments Total collections will be recognized as
rental income over the lease term.

Lease bonus Recognized as a liability (unearned rent

income) and to be amortized over the
lease term

Contingent rent Added to rent income in the period which

they arise

Refundable security deposit Recognized as a liability (non-current)

and may be affected by time value of
money
Formulas for
periodic rental a) Lease bonus
Lease bonus XX
income arising Divided by: Lease term XX
Rental income XX
from: b) Unequal rental payments
Total payments for the entire lease term XX
Divided by: Lease term XX
Rental income XX
c) Rent Receivable/Unearned Rent Income
Total rental income to date XX
Less: Total collection to date XX
Rental receivable/Unearned Rent Income XX
Other Costs Incurred
Initial direct costs (e.g.,
professional fees and
commissions)
Executory costs (e.g.,
property taxes, insurance
and maintenance costs)
If paid by the lessee If paid by the lessor
Ignore Capitalized as part of the
cost of leased asset and to
be recognized as expense
over the lease term on the
same basis as the lease
income
Recognize as income equal Expense
to the amount paid by the
lessee.
At the same time, the lessor
shall recognize expense for
the payment made to other
parties related to the
executory costs.
Other Items Related to an
Operating Lease

Leased assets Continued to be recognized

in the books and will be
depreciated using method as
required by the lessor's
policy.
Leasehold improvements Ignore
ILLUSTRATION: Operating Lease (with Lease Bonus)

• On June 1, 2021 Alexander Company entered into a 5-year nonrenewable lease,

commencing on that date, for office space and made the following collections from
the lessee:
Bonus to obtain lease P300,000
First month's rent 100,000
Last month's rent 100,000

Required:
In its income statement for the year ended June 30, 2021, what amount should
Alexander report as rent income?
SOLUTION:
Periodic collections:
Monthly rental P 100,000
Multiply by: Number of months used in 2021 1 P 100,000

Lease bonus:
Lease bonus P 300,000
Divided by: Lease term (in months) 60
Monthly Rental Income 5,000
Multiply by: Number of months used in 2021 1 P 5,000
Total Rental Income in 2021 P 105,000