Two Main Types of Leases: Capital and Operating

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Introduction

Lease is a significant question in the accounting as from the type the lease, which is obtained, a lot of factors depend, both the costs of the company and the incomes of it. The changes in the lease policies have occurred recently, and the new codifications, which are implemented in the new GAAP Codification and IAS 17, provide some changes in the activities and actions, which are provided by both lessee and lessor. Using the new GAAP Codification and IAS 17, the current accounting for determining operating versus capital leases under GAAP and IFRS is going to be compared and contrasted in the current paper.

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New GAAP Codification

Introducing some significant differences, which are implemented in the current IAS 17, and the innovations, which are provided in the new GAAP Codification, the following issues should be mentioned, that the new standards were implemented on June 30, 2009, and must be followed from that date. The hierarchy of GAAP was reduced to two levels, that which is in the codification (authoritative) and that, which is not in the codification (not authoritative). To be more specific, the changes, provided on the 30th of June changed the standards of the lease accounting completely. In other words, the reporting and accounting were changed in the design to make the system easier to access and use. The main changes occurred in the referencing system, which allows cataloging the items and making the research easier. For example, a new codification system was offered, and the classification is provided in the following form, XXX-YY-ZZ-PP, where XXX is the topic, YY is the subtopic, ZZ is the section and PP is the paragraph (Generally Accepted Accounting Principles).

IAS 17

Analyzing the International Accounting Standard 17, it was concluded that the main aim of the is to create the principles according to which the leases will be classified to provide the standardization of the account policies for lessees and lessors. The classification falls into two types of leases, finance, or capital lease, and operational lease. The improved Codification, which was provided on June 30, 2009, stresses these two types as the main leases in the accounting and takes them as the main for implementation by lessees and lessors (IAS 17 Leases par. 1).

Operating versus Capital Leases

Starting the discussion with the differences of operating and capital leases, the following items should be mentioned: the accounting for operating lease is provided based on the right to use the owner’s property and no other obligations and responsibilities are obtained by the lessee. The property is returned to the lessor and further handshaking is either possible or not, depending on the arrangement of the sides. The other case is with the capital lease, when the agreement, which takes place, implies some risks on the lessee as well as some benefits of such actions are provided. The object of the capital lease becomes an asset and, at the same time, a liability to the lessee. In other words, the main difference between these two types of the lease is that the expenses are recognized sooner by the capital lessee, than by the operating lessee, if to take the same conditions and time length for both situations (Operating versus Capital Leases par. 2).

Having analyzed the following information, the advantages and disadvantages for both lessee and lessor may be identified in these two types of leases. Considering operating lease for the lessee, it may be concluded that the lessee will suffer expenses in this type of lease, while the benefit will be viewed in the time length. Turning to capital lease and viewing it from this perspective, the payment will be reduced to the lessee and the costs, which will be spent on the lease, will be considered as the asset. Analyzing the other perspective, lessor’s one, the operating lease will be considered as the asset, versa to the lessees’ perspective and the time pattern will not b considered as the benefit in this case. Referencing to the finance, or capital, lease, the lessor will get the revenue from the periodical rates, which are going to be received from the lessees’ net investments.

These two perspectives are profitable and convenient for both sides only in the case when all conditions are discussed and the details analyzed and in the reference to these conditions the necessary type of lease should be chosen, which will correspond to the selected technique, to the business leading and will be profitable to these sides, lessor and lessee.

Conclusion

In conclusion, the changes in the accounting legislation and the GAAP Codification lead to the identification of two main types of leases, operating and finance (capital). The differences may be seen at once while operating lease is based on the time usage of the lessor’s property, which is returned after the time of contract expires, the capital lease is considered as the asset to the lessee and the additional obligations and responsibilities are applied on the lessee by the lessor.

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Works Cited

Generally Accepted Accounting Principles. Accounting Standards Codification. Web.

IAS 17 Leases. Technical summary. 2009. Web.

Operating versus Capital Leases. The New York University. Web.

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BusinessEssay. (2022, February 18). Two Main Types of Leases: Capital and Operating. Retrieved from https://business-essay.com/two-main-types-of-leases-capital-and-operating/

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BusinessEssay. (2022, February 18). Two Main Types of Leases: Capital and Operating. https://business-essay.com/two-main-types-of-leases-capital-and-operating/

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"Two Main Types of Leases: Capital and Operating." BusinessEssay, 18 Feb. 2022, business-essay.com/two-main-types-of-leases-capital-and-operating/.

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BusinessEssay. (2022) 'Two Main Types of Leases: Capital and Operating'. 18 February.

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BusinessEssay. 2022. "Two Main Types of Leases: Capital and Operating." February 18, 2022. https://business-essay.com/two-main-types-of-leases-capital-and-operating/.

1. BusinessEssay. "Two Main Types of Leases: Capital and Operating." February 18, 2022. https://business-essay.com/two-main-types-of-leases-capital-and-operating/.


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BusinessEssay. "Two Main Types of Leases: Capital and Operating." February 18, 2022. https://business-essay.com/two-main-types-of-leases-capital-and-operating/.