Leasing Terms

ASC 842 Leases is the US GAAP standard for lease accounting. The FASB issued it in February 2016 through ASU 2016-02. Public business entities applied it for fiscal years beginning after December 15, 2018; other entities later.

A direct financing lease is a lessor lease classification under ASC 842 for leases that do not qualify as sales-type leases but still transfer substantially all of the asset's value to the lessee and third parties, with collection of payments probable.

An embedded lease is a lease contained in a contract that is not labeled as a lease, such as a service, supply, or outsourcing agreement, but that conveys the right to control the use of an identified asset.

A finance lease is a lease that transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. Economically, it resembles a purchase financed over time.

IFRS 16 Leases is the international accounting standard for leases. The IASB issued it in January 2016, and it became effective for annual periods beginning on or after January 1, 2019.

The incremental borrowing rate (IBR) is the rate of interest a lessee would have to pay to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment.

Initial direct costs (IDC) are incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained, such as commissions paid to brokers or sales staff.

The interest rate implicit in the lease is the discount rate at which the present value of the lease payments and the unguaranteed residual value equals the fair value of the underlying asset plus the lessor's initial direct costs.

Lease and non-lease components are the separate units of account in a contract that contains a lease: the lease component is the right to use an identified asset, while non-lease components are other goods or services, such as maintenance, consumables, or support.

A lease liability is a lessee's obligation to make lease payments, measured at the present value of the lease payments not yet paid.

A lease modification is a change to the terms and conditions of a lease that alters its scope or its consideration and was not part of the original contract terms.

The lease term is the noncancellable period for which a lessee has the right to use an underlying asset, adjusted for options to extend or terminate the lease where their exercise, or non-exercise, is reasonably certain.

The lessor is the party that provides the right to use an asset. The lessee is the party that obtains that right in exchange for consideration.

The net investment in the lease is the asset a lessor recognizes for a sales-type or direct financing lease (ASC 842) or a finance lease (IFRS 16), in place of the underlying asset.

An operating lease is a lease that does not transfer substantially all of the risks and rewards of ownership of the underlying asset. Economically, it is closer to a rental than to a sale.

A residual value guarantee (RVG) is a guarantee made to a lessor by the lessee or a third party unrelated to the lessor that the value of the underlying asset at the end of the lease will be at least a specified amount.

A right-of-use (ROU) asset represents a lessee's right to use an underlying asset for the lease term. Lessees recognize it, together with a lease liability, at the commencement of a lease.

A sale-and-leaseback is a transaction in which the owner of an asset (the seller-lessee) transfers it to another party (the buyer-lessor) and leases it back.

A sales-type lease is a lessor lease classification under ASC 842. It applies when the lease effectively transfers control of the underlying asset to the lessee.

Selling profit (or selling loss) is the profit a lessor earns on the "sale" element of a lease that transfers control or substantially all risks and rewards of the underlying asset – typically when a manufacturer or dealer uses leasing as a way to sell its products.

A sublease is a transaction in which an underlying asset is re-leased by a lessee (the intermediate lessor) to a third party, while the original lease (the head lease) between the head lessor and the intermediate lessor remains in effect.

Variable lease payments are payments for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.