By LeaseCrunch® on November 10, 2021 at 9:54 AM
Leases inherently require two parties in order to exist. One party leases their asset/assets to the other, and a lease is signed as a contractual agreement outlining the details of the asset loan.
One of these parties is called the ‘lessee’, and one of these parties is called the ‘lessor’. But who is lessor and lessee? How do financial statements differ for both parties? And why is using software to adhere to lessor/lessee accounting the best option for an organization? Let’s start with some definitions.
What’s the Difference Between Lessor and Lessee?
A lessor is someone who grants the use of an asset to someone else; they are the owner of the asset under agreement. The lessor also has the sole ability to grant special privileges to the lessee, such as early termination of lease or renewal on unchanged terms.
The advantage of being a lessor is that in granting someone the ability to use your property, you get a return on your investment in that property without giving up ownership.
A lessee in contrast is someone who makes a one-time payment or a series of periodic payments to the lessor in exchange for using their property. They never own that which they lease; they only temporarily have the ability to utilize it.
The advantage of being a lessee is that it may be easier to finance use of a piece of property temporarily instead of purchasing outright whatever it is the lessee is looking to use. Sometimes the needed asset might only be available through a lease.
Who is Lessor and Lessee?
A lessor can be either an individual or a legal entity, like a business or organization. The lessor is always the owner of the asset.
For example, if a car is the asset in question, the lessor would be the property owner or auto dealer leasing out the car.
The lessee is always the one using the asset temporarily. They never own the asset over the course of the lease. If ownership does transfer to the lessee, that transfer ends the lease.
In our car example, a lessee would be the individual or entity to whom the car is on loan from the dealer or property owner.
Is a Lessee Tenant or Landlord?
When the asset under lease is a piece of real estate, then the lessee is a tenant and the lessor is the landlord. The lessee is the temporary occupant of the property, and the lessor owns the property in which the lessee is staying.
Who Holds the Lease of the Property?
The lessor, or landlord, holds the lease of the property.
Lessor vs. Lessee Accounting
With the advent of recent lease accounting standard changes, lessors and lessees also have to change how they document leases on their financial statements. Documentation is now different for lessors and lessees in the following ways:
ASC 842 - Under ASC 842, which replaced ASC 840, there are few changes for how lessors document their leases. The big effect of the new lease standard is on lessees, who must add operating leases onto their balance sheets. Take a look at our resource that shows a side-by-side comparison of ASC 840 lease accounting and ASC 842 lease accounting.
IFRS 16 - Similar to ASC 842, this international accounting standard requires lessees to recognize all leases on their balance sheet. The difference is that there is only one resulting lease type, which is similar to the “finance” lease under ASC 842. As a result, lessee income statements are affected, in addition to the balance sheet. Under this standard, lessor accounting is substantially unchanged.
GASB 87 - Lessors record a lease receivable and a deferred inflow of resources at the commencement of the lease term. A lessee lease receivable is calculated as the present value of the lease receipts expected during the lease term. Similar to IFRS 16, there is only one resulting lease type for all leases, which is similar to the “finance” lease under ASC 842.
Why Software is the Best Option for Lessor/Lessee Accounting
Documenting lessee vs lessor information on your financials can be difficult. With guidelines getting increasingly strict for both lessors and lessees when it comes to documenting their leasing financials, using software to quickly and compliantly calculate leases is becoming more popular. LeaseCrunch provides software that does lease accounting for you. Our software is:
- Efficient: Never again do a manual calculation for lease accounting. With that, eliminate manual data entry errors and increase the accuracy of your financial statements.
- Easy to use: our software crunches the numbers behind the scenes, meaning the extent of your work is interacting with our user-friendly interface and in-line resource guide.
- Customizable: our software is completely scalable to your business size, no matter how small or large.
- Secure: we have embedded security measures in our software to keep your financial data safe.
- Developed by experts: LeaseCrunch is founded collaboratively by CPAs who have lived in both the public accounting and private industry world, along with software professionals who ensure our ease-of-use, accuracy, and security protocols are paramount throughout the software.
Furthermore, we are excited to announce that we have developed a new feature of our software! LeaseCrunch now supports lessor accounting for GASB 87! This feature is available immediately for LeaseCrunch customers. You can see it in action in this video walkthrough.
Not looking forward to calculating journal entries and extensive disclosures for the new lessee vs lessor accounting standards? Let us deal with it. Try out our software and learn how simple it all can be. Reach out to us today for a demo.