Lease Accounting

A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Under Accounting Standards Codification (ASC) 842, Leases, lessees recognize assets and liabilities for most leases (including operating leases). For these leases, a right-of-use (ROU) asset will be recognized on the balance sheet along with a corresponding liability for the lease obligation.

The right-of-use asset is measured as the initial amount of the lease liability plus any initial direct costs minus any lease incentives. The right-of-use asset and lease liability is estimated as the present value of the lease payments using the rate implicit in the lease, or if that is not available, the lesseeā€™s incremental borrowing rate (IBR). The IBR is defined as "the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment."

In estimating the IBR, a lessee should assume that the lender has recourse to the general credit of the lessee and the specific asset that serves as collateral for the borrowing. As such, the lessee can not assume the borrowing is over collateralized or otherwise secured by other liquid assets. Given the definition, there are several specific factors to consider when estimating the IBR including adjustments for seniority based on collateral quality, term adjustments considering early termination and renewal options, and foreign country/currency risk premiums.

Oracle Capital can assist with the valuation of the ROU asset/lease liability and estimation of the IBR.

See how we can help with your implementation of the new Lease Accounting Standard, ASC 842 by clicking here.