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What is a Lease?

What is a Lease?

By  Janet Sifers

October 9, 2020

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What is a lease?

Before the lease accounting standards came along, there was more flexibility in how organizations managed leased assets. Join Janet Sifers, Senior Director of Product Marketing, LeaseAccelerator and her colleague, Len Neuhaus, CPA, VP of Lease Accounting, LeaseAccelerator, for a 4-minute discussion around, ‘What is a lease?’.

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What is a lease? Text version available:

Janet Sifers: Hi everyone I’m Janet Sifers, the Head of Product Marketing at LeaseAccelerator. I’m here today with Len Neuhaus, a Technical Accounting Expert and CPA and we’re here to remove some of the complexity around lease accounting. Today we’re talking about the definition of a lease and how to identify leases. So Len… First, what is the definition of a lease?

Len Neuhaus: So Janet a lease is a contract that provides the use of an asset owned by another person or entity for a period of time in exchange for consideration. So let’s talk about what those four components are. A contract. Well, it has to be in agreement, it can be in writing, it can be in a world, but the terms have to be laid out for a period of time. You have to think about on an ongoing basis what the period of the time of release, would they have a lease that says in the term. It’s five years, but are there early provisions to exit the lease? Are there abilities and options to extend the lease? So you may have a five-year lease that has a five year reasonably certain holding period. It could be longer, or it could be shorter. The asset itself has to be used by the lessee predominantly, so if you share the asset and you don’t get the majority of the value of that asset, then that would not be a lease in those cases. And then you have to have consideration. You have to pay for the use of that asset. So something that you would get, let’s say on an evaluation basis, that would not be a leased asset. So those four terms. And then there’s a lot of information behind it in the standard are the basics of what a lease is: contract, period of time, using an asset owned by somebody else, and you have to pay for it.

Janet Sifers: Great, great outline. So secondly, how do you identify a lease?

Len Neuhaus: So what are the key features that we look at as both accountants and dealing with auditors is completeness of lease population and obviously accuracy. So you would identify leases primarily through reviewing the contracts and the contracts can be specifically contracts in some countries they might even be called a rental agreements. You might also have embedded leases, where you have leases that are embedded inside service contracts. And typically the way you would do this from a compliance point of view is, you would really look at your cash disbursements journal. See you have recurring payments. You would also look at your accounts payable journals to see what types of vendors you have that might have recurring payments in nature as well. And then finally, you would look at your master data to see who/ which vendors are set up as lessors within your system. So between those three areas, you probably will find most of the releases.

Janet Sifers: Great, because that’s something that companies struggle with making sure that they have that full, full data about their full least portfolio. So a kind of a fun question, though, to wrap up for today, what’s your favorite lease?

Len Neuhaus: So I was working with a global fortune 500 company and they shared a contract with me. For the usage of part of their parking lot. They took more parking spaces within their parking lot and on those four spaces they erected a windmill and they didn’t own the windmill. They actually leased the windmill and they generated power from the windmill so that lease was an asset embedded in an energy contract. And that was my favorite. So I don’t know very many people who are leasing windmills, but I had one of those.

Janet Sifers: That does sound pretty unusual. Thanks, Len. Thanks everyone for listening. Join us next time for more lease accounting essentials.