FINANCE/SALES-TYPE Leases

To illustrate how to account for a a lease from the perspective of both a lessee (user of an asset) and a lessor (owner of an asset), let look at the following example. We'll start with classifying the lease using the criteria previously discussed.

Classifying lease

How are lease payments recorded?

Do right-of-use assets depreciate?

Yes! Like Property, Plant, and Equipment (PP&E) assets, leased, right-of-use assets also decline in value. However, we refer to decreases in value over time as amortization rather than depreciation. Most often, the straight-line method (i.e., amortization each period = value of asset ÷ lease term) is used to calculate amortization each period.