Lease definition
/What is a Lease?
A lease is an arrangement under which a lessor agrees to allow a lessee to control the use of identified property, plant, and equipment for a stated period of time in exchange for one or more payments. A lease arrangement is quite a useful opportunity, for several reasons. First, the lessee reduces its exposure to asset ownership. Second, the lessee obtains financing from the lessor in order to pay for the asset. And finally, the lessee now has access to the leased asset.
An arrangement is considered to give control over the use of an asset when the lessee obtains the right to substantially all of the economic benefits from using an asset, and the lessee obtains the right to direct the uses to which an asset is put.
The following additional points all apply to whether a lease exists:
Partial period. If a leasing arrangement only lasts for a portion of the period spanned by a contract, a lease is still presumed to exist for the partial period specified within the contract.
Right of substitution. If a contract allows the supplier to substitute an identified asset with another asset throughout the usage period, there is no lease. This situation only applies when the supplier has the practical ability to substitute alternative assets, and the supplier obtains a positive economic benefit from doing so. The evaluation of the ability to substitute assets does not include assets that are unlikely to occur.
Since the accounting for a lease only applies to property, plant, and equipment, it does not apply to other types of assets that may also be leased. These include assets under construction, biological assets (such as orchards), exploration assets (such as oil and gas exploration rights), intangible assets, and inventory.