Leasing is a popular financing option for companies. However, the way leasing transactions have been structured in the past has caused major variations in the presentation of financial statements. There have been two leasing options available to companies:
- Financing lease — used to finance equipment for the major part of its useful life, when there is a reasonable assurance that the lessee will obtain ownership of the equipment by the end of the lease term
- Operating lease — used to finance equipment for less than its useful life, and at the end of the lease term the lessee can return the equipment to the lessor without further obligation
It is important for users of financial statements to have a clear picture of the lease obligations of both the lessee and the lessor. The objective of the proposed new standard is to facilitate a better understanding of debt financing as it relates to leases. The standard is intended to ensure that leases are reflected properly on the balance sheet and in the statement of cash flow.
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