There are no fewer than 14 different types of leases to know about and be able to account for. We shall explore these in this article.
When accounting for the different leases, it is also necessary to be aware of the different accounting standards that need to be adhered to. For example, ASC 842. This particular standard aims to record all leases on the balance sheet.
So, what are the different types of leases that we might come across to record inside our accounting software and on our balance sheet?
An arrangement between landlord and business concerning the renting of a property.
Conveyance Type Lease
A longer-term lease that transfers ownership to the lessee.
This type of lease will be across national frontiers.
Financial Lease or Capital Lease
In this case, the lease is paid for over a long period and the amount paid by the lessee to the lessor will be more than the actual cost of the property with regards to leasing charges.
With this type of lease, the leasing company will be located in a foreign country.
Parties to the lease will be from different countries, so similar to the Cross-Border Lease, but greater distances are involved.
Leveraged and Non-Leveraged Lease
Multiple financiers can be involved when the value of the asset lease is of a high value and so difficult for the lessor alone to finance.
Net and Non-net Lease
Here, any maintenance or incidental expenses will be on the lessor’s account.
Non-Payout and Full Lease
With a non-payout lease, the same asset will be leased several times by the lessor due to non-payment. Whereas, with a full lease, the asset’s full value will be recovered by the lessor through the leasing process.
The lease in this case will be for a short and specific period. Perhaps where construction machinery is used for a particular building project and then returned. This may happen several times throughout the year. It avoids the need for a construction company to store the asset when they are not using it on a particular building site.
Sales Aid Lease
This type of arrangement is a marketing tie-up between the manufacturer and the lessor. It is a financial arrangement that is beneficial to both sides.
Sales and Leaseback
The company owning the asset will ultimately sell the asset to the lessor. The asset remains with the lessee during the period of the lease but it is owned by the buyer, who then has the option of retaining the asset for their business.
Specialized Service Lease
The lessor of the asset will be the specialist here. It is a popular kind of lease for vehicles.
This simply means the lease is not a loan on security, but instead, a lease.
Keeping up-to-date with lease accounting is an ongoing process and we should never lose sight of what is changing so that we can effectively account for it in our financial records and, therefore, on our balance sheet.
There is software out there to help you with the accounting, but you still need certain knowledge of lease accounting to use it. The software is good at guiding you to put figures in the right places and in keeping track of all your leases, which as you can see from above, can relate to different frontiers, borders, or countries.
We always need to know who owes what and how long a lease is for so that we can track who has our asset and when we might expect it back as part of the leasing agreement.
So, there we have it. An A-to-Z guide of the different kinds of leases. Follow this information, and you will be an expert in no time.