How to Record the Lease Liability and Corresponding Asset

Jun 8, 2020
Finance

Introduction

Welcome to Denaro Anthony D Atty, your trusted source for legal advice and guidance in law and government. In this article, we will discuss the process of recording lease liabilities and corresponding assets, ensuring you have a thorough understanding of the necessary steps involved.

Understanding Lease Liability

A lease liability refers to the obligation of a lessee to make lease payments to the lessor for the use of a specific asset. It arises when a company enters into a lease agreement, where they gain the right to use an asset for a specified period in exchange for regular rental payments.

1. Recognizing the Lease Liability

The first step in recording the lease liability is to recognize it on your balance sheet. Under the Generally Accepted Accounting Principles (GAAP), lessees are required to recognize lease liabilities for leases with terms exceeding 12 months.

2. Determining the Lease Term and Discount Rate

To accurately measure the lease liability, you must determine the lease term and the appropriate discount rate. The lease term encompasses the non-cancellable period of the lease, including any optional renewal periods if reasonably certain. The discount rate is typically the lessee's incremental borrowing rate unless the rate implicit in the lease is readily determinable.

3. Calculating the Lease Liability

The lease liability is calculated by finding the present value of lease payments over the lease term, discounted using the appropriate discount rate. This figure represents the present value of the future lease payments that the lessee owes to the lessor.

Recording the Corresponding Asset

Alongside recording the lease liability, it is crucial to record the corresponding asset on your balance sheet. This represents your right to use the leased asset over the lease term.

1. Determining the Right-of-Use Asset

The right-of-use asset is initially measured at the cost of the lease liability, including any initial direct costs incurred by the lessee. This ensures that the asset reflects the value of the lease liability assumed.

2. Subsequent Measurement

The right-of-use asset is subject to subsequent measurement, primarily using the cost model or fair value model. Under the cost model, the asset is reported at cost less accumulated depreciation and impairment losses. The fair value model assesses the asset at fair value less any accumulated depreciation and impairment losses.

Conclusion

Recording the lease liability and corresponding asset is a crucial aspect of lease accounting. By following the steps outlined in this article, you can ensure accurate financial reporting and compliance with applicable accounting standards.

Reach out to Denaro Anthony D Atty for Expert Legal Advice

If you need further guidance or have specific questions related to recording lease liabilities and corresponding assets, Denaro Anthony D Atty is here to help. As a leading law firm specializing in law and government matters, our experienced attorneys can provide you with comprehensive legal advice tailored to your unique situation. Contact us today to schedule a consultation and let us assist you with your legal needs.

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