Introduction: Lease accounting: Operating lease accounting
When accounting for operating leases accountants generally follow the legal form of the transaction: payments for the hire of an asset.
Generally accepted accounting practice treats the lessor as the owner of the asset, and not the lessee. The lessor shows the asset in the balance sheet and recognises the gross rentals as income. The lessee recognises the gross rentals paid as lease rental expenses.
Therefore an operating lessor shows the leased asset on its balance sheet as a fixed capital asset and depreciates it in the normal way. All the rentals receivable are recognised as income, usually on a straight line basis over the term of the lease. This means adding up all the rents for the entire period of the lease and spreading them evenly over the whole period.
Similarly, an operating lessee’s rentals are charged to the profit and loss account, usually over the term of the lease and on a straight line basis.
Further guidance on accounting for operating leases is at BLM12000.