User of a leased asset
Lessee
Owner of a leased asset
Lessor
Fundamental rights and responsibilities of ownership are retained by the lessor and the lessee is only using the asset temporarily
Operating Leases
Installment purchases/sales that are formulated outwardly as leases
Capital Leases
Leases where the lessor finances the asset for the lessee and earns interest revenue over the lease term
Direct Financing Lease
In addition to interest revenue earned over the lease term, the lessor receives a manufacturer’s or dealer’s profit on the sale of the asset
Sales-type Lease
Provision in the lease contract that gives the lessee the option of purchasing the leased property at a bargain price
Bargain Purchase Option (BPO)
Useful life of an asset
Expected Economic Life
Gives the lessee the option to renew the lease at a bargain rate
Bargain Renewal Option
Payments that the lessee is required to make in connection with the lease
Minimum Lease Payment
Lease agreements may call for uneven rent payments during the term of the lease
Rent Abatement
Account title when a lessee makes improvements to leased property that reverts back to the lessor at the end of the lease
Leasehold Improvements
Total of periodic rental payments and residual value
Gross Investment in the Lease
Maintenance, insurances, taxes, and any other costs usually associated with ownership
Executory Costs
Costs incurred by the lessor that are associated directly with originating a lease and are essential to acquire the lease
Initial Direct Costs
The owner of an asset sells it and immediately leases it back from the new owner
Sale-leaseback Transaction
Involves land-exclusively or in part
Real Estate Leases