Financial reporting and tax implications of real estate lease

Abstract

Leasing is a very popular way of acquiring fixed assets, but despite its importance and presence the users of financial statements are often not in a position to realistically consider reporting entity's lease transactions and their impact on entity's financial position and performan­ce. For years, current financial reporting for leases has been subject to many critiques. The reason for this primary lies in the fact that it left a lot of opportunities for manipulation during the lease classification into finance and operating leases, whereby the former must be reported on balance sheet, and the latter remains off it. Bearing in mind that operating leases have favourable effects on lessee financial statements and a number of accounting ratios, the practice of lessee to deliberately structure lease contracts to circumvent capitalisation of requirements was noticed. Attempts to reform lease accounting have been intensified and their termination might be expected in a form of a new approach, which would be based on the 'right of use' model, hence leading to reporting of almost all leases on balance sheet. Nevertheless, numerous dilemmas complicate the process of achieving comprehensive solutions. It should be considered that radical changes in lease accounting could have effects on lease taxation as well, particularly in the countries where stronger relationship between financial and tax reporting exists. It is also important to recognize the effect of a new approach to lease accounting from the sale and leaseback perspective. This transaction is particularly attractive in the conditions of economic crisis, primary because it enables companies to achieve liquid assets. However, if leases are classified into operating ones, favourable effects on financial reporting seller/lessee should not be neglected either.