Accounting

What is a Lease? | What is a Lease Agreement?

What is a Lease? Does every service contract constitute a lease agreement? International Accounting Standards (IAS) 17 answered to these questions. According to Para 4 of IAS 17 (Accounting for Leases) defines a lease as ‘an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

Therefore, under a lease agreement the lessee acquires, not the asset itself but the right to use the asset for a specified time. Leased assets range from Physical Assets such as land, plant and machinery and vehicles through to Intangible Assets such as Copyright, Patents and Mineral rights. Lease agreements may also result in the ultimate transfer of ownership from lessor to lessee.

For example, under an installment sale or a hire purchase agreement, the lessee will use the asset while paying for its acquisition. The agreed period of time may be different from a short period, such as the daily hire to a longer period, such as the rental of office space by a company.

The key feature of leases is the existence of an asset owned by one party (the lessor) but used by another party (the lessee) for some or all of its economic life.

 Service agreement concerning the provision of services such as, cleaning or maintenance between two parties is not considered as a lease agreement since the contract does not involve the use of an asset. Then, what is a Lease in fact? Because these above mentioned agreements are regarded as Executory Contracts where both parties are yet to perform the actions to an equal extent as required by the contract.

Therefore, each party is regarded as having a right and obligation to participate in a future exchange or to compensate or to be compensated for the consequences for not performing actions thereto. A repairing contract entitles an individual to get repairing services and constructs an obligation to pay for those services after they have been received. Here, the key issue is the performance of the service. Until the repairing services are delivered, the contract is simply an exchange of promises and not of any future economic benefits, thus not lease agreement.

The presence of a noncancellable service agreement includes significant penalties for non-performance and may result in the service recipient acquiring control over future economic benefits (the right to receive repairing services) that are likely to be delivered and can be reliably measured. In other words is an asset. I think, now we know the answer to what is a Lease in fact. Know What is a lease incentive?

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