In this video, I discuss I introduction to accounting for leases from the lessee perspective as covered on the CPA exam.
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Leases are agreements used by both public and private entities to access assets without fully owning them, thus minimizing the risks associated with ownership. In essence, a lease agreement involves two parties: the lessor, who owns the asset and grants the right to use it, and the lessee, who pays to use the asset for a certain period.
For an agreement to qualify as a lease, it must meet two key criteria:
Identifiable Asset with Limited Substitution: The lease must involve a specific asset that the lessor cannot easily replace with another. This means the asset in the lease agreement is clearly defined and distinct, and the lessor doesn't have the freedom to substitute the asset with another at will. This ensures that the lessee gets access to a particular asset as agreed upon, without the risk of it being swapped out for something else without their consent.
Control over the Asset: The lessee must have control over how the asset is used during the lease term. This involves two main rights:
Economic Benefits: The lessee should be able to enjoy most, if not all, economic benefits from using the asset. This means any financial gains or benefits derived from the asset's use, such as income generation or cost savings, should primarily go to the lessee.
Direction of Use: The lessee should have the authority to decide how the asset is used within the terms of the lease. This gives the lessee the autonomy to utilize the asset in a way that best suits their needs, as long as it falls within the agreed-upon conditions of the lease.
In summary, a lease is a formal arrangement where one party (the lessor) allows another (the lessee) to use a specific asset for a period in exchange for payment, with the condition that the lessee gets significant control over the asset's use and benefits from it economically.
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