FRS 116 Leases – Recognising and Measuring Operating Leases
Operating leases are the leases that do not transfer all the rewards and risks that are incidental to the underlying asset’s ownership significantly. The recognition, measurement, as well as presentation of operating leases, are not the same as those of the finance leases. To understand their differences and the correct way to account for them respectively, you as the lessor need to spend some time to study FRS 116: Leases so that you can avoid making some mistakes that can confuse the users of the financial statements. If you are too busy and are unable to do so, feel free to seek help from an accounting firm in Singapore and get the experts’ advice.
When recognising the lease payments arising from operating leases as the income, lessors should use a straight-line basis or implement a different systematic basis. If there is another basis which can represent the pattern in which the benefit the lessee gets from the use of that underlying asset diminishes as time passes more clearly, then the lessor should choose to implement that basis.
A lessor needs to recognise the costs incurred to earn the lease income as expenses. This includes the costs for depreciation. Besides, the lessor should sum up the initial direct costs it has incurred to obtain an operating lease and the underlying assets’ carrying amount. Then, it should recognise the initial direct costs as an expense throughout the lease term by using the same basis that it has applied to the recognition of the lease income.
The depreciation policy that the lessor use on the depreciable underlying assets under operating leases should be the same as the policy that it has applied on other similar assets. When calculating depreciation, the lessor should apply FRS 16 as well as FRS 38. In addition, FRS 36 can be helpful to the lessors when they want to identify whether impairment has happened on the underlying assets subject to an operating lease. If there is, they may also apply this standard when they want to manage any impairment loss they have determined.
Note that manufacturer or dealer lessors do not recognise any selling profit when they enter an operating lease. This is because it is not the same as a sale (Also see FRS 116 Leases – Sale and Leaseback Transactions). Apart from that, if there is any lease modification on an operating lease, the lessor should treat the modification as a new lease since the date the modification starts to apply. In this case, the lessor should include any accrued or prepaid lease payments relevant to the original lease into the lease payments of the new lease.
Lastly, according to FRS 116, the lessors should present underlying assets under operating leases in its balance sheet. The presentation should be done based on the nature of that underlying asset.