Lease Accounting Vocabulary

Comprehensive vocabulary flashcards covering basic lease accounting terminology and ASC Topic 842 criteria.

Lease

A contractual agreement between a lessor and a lessee that conveys to the lessee the right to use specific real or personal property belonging to the lessor for a specified period of time in exchange for consideration.

Lessee

The original tenant or user of a leased asset.

Lessor

The owner of the leased asset.

Lease term

Duration of a lease; length of time a lease will be in effect.

Lease payments

Periodic payments from the lessee to the lessor for the right to use property subject to a lease.

Classification of leases

A system of criteria established in ASC Topic 842 to trigger the appropriate accounting treatment for a given lease.

Finance lease

One of the lease classifications in which the lessee effectively obtains control of the underlying asset by meeting one of five lease classification criteria.

Operating lease

A lease in which a lessor transfers the use of an asset to a lessee for a period of time but does not effectively transfer control of the underlying asset.

Sales-type lease

A lease classification in which a lessor effectively transfers control of an underlying asset to a lessee, and which may or may not have profit or loss.

Short-term lease

A lease that, at the commencement date, has a lease term of $12$ months or less and does not include a purchase option reasonably certain to be exercised.

Right-of-use asset (ROU asset)

An asset representing a lessee’s right to use an underlying asset during the lease term.

Bargain purchase option

A provision in a lease giving the lessee the option to purchase the leased asset at a specified exercise price that the lessee is reasonably certain to exercise.

Guaranteed residual value (GRV)

A guarantee made by a lessee to the lessor that the value of an underlying asset returned at the end of the lease will be at least a specified amount.

Unguaranteed residual value

The estimated residual value of a leased asset exclusive of any guaranteed portion.

Executory costs

Obligations for taxes, insurance, or maintenance associated with leased property.

Incremental borrowing rate

The interest rate the lessee would incur to borrow funds necessary to purchase the leased asset with similar repayment terms.

Interest rate implicit in the lease

The interest rate that causes the present value of lease payments plus residual value to approximately equal the fair value of the leased asset.

Net investment in lease

The present value of lease payments plus the present value of any unguaranteed residual value.

Effective interest method

An accounting process used to allocate lease payments between interest and reduction of lease liability/net investment.

Indirect costs

Incremental costs associated with consummating a lease that would not have been incurred had the lease not been executed.