Navigating leases can be a challenge, especially when it comes to distinguishing between a lessee and a lessor. Any lease requires two key players. One is the lessor, the party that has an asset available for leasing, and the other is the lessee, the party that pays to use the asset. This lessee vs. lessor dynamic is at the core of lease accounting.

But who is a lessor and a lessee? How do financial statements differ for both parties? What rights do lessees have? And why is using software to adhere to lessor/lessee accounting the best option for an organization? Let’s start with some definitions.

What’s the Difference Between a Lessee vs. Lessor?

A lessee in contrast is someone who makes a one-time payment or a series of payments to the lessor in exchange for using their property. They do not own that which they lease; they only temporarily have the ability to utilize it. If ownership transfers from lessor to lessee, there is no longer a lease.

An advantage of being a lessee is that it may be easier to finance the use of property temporarily instead of purchasing that asset outright. Sometimes the needed asset might only be available through a lease.

A lessor is someone who grants the use of an asset to someone else; they have legal rights to lease an asset under an agreement. The lessor also has the ability to grant special privileges to the lessee, such as early termination of the lease or renewal on unchanged terms.

An advantage of being a lessor is that in granting someone the ability to use your property, you get a return on your investment in that property without giving up ownership.

What Is an Example of a Lessee vs. Lessor?

The lessee is the one paying to use the asset for a period of time. They do not own the asset throughout the lease. If ownership does transfer to the lessee, that transfer ends the lease. In our car example, a lessee would be the individual or entity to whom the car is on loan from the dealer or property owner.

A lessor can be either an individual or a legal entity, like a business or organization. The lessor is either the owner of the asset or has the legal right to lease the asset to someone else. For example, if a car is the asset in question, the lessor would be the property owner or auto dealer leasing out the car.

Is a Lessee a Tenant or Landlord?

When the asset under lease is a piece of real estate, then the lessee is a tenant and the lessor is the landlord. The lessee is the temporary occupant of the property, and the lessor owns the property in which the lessee is occupying.

Lessee vs. Lessor Accounting

With the advent of the new lease accounting standards, lessors and lessees also have to change how they document leases on their financial statements. Documentation is now different for lessees and lessors in the following ways:

ASC 842

Under ASC 842, which replaced ASC 840, there are nominal changes to how lessors document their leases. The big effect of the new lease standard is on lessees, who must add operating leases onto their balance sheets. Take a look at our resource which shows a side-by-side comparison of ASC 840 lease accounting and ASC 842 lease accounting.

IFRS 16

Similar to ASC 842, IFRS 16 from the International Financial Reporting Standards requires lessees to recognize all leases on their balance sheets. The difference between IFRS 16 and ASC 842 is that IFRS 16 has only one lease type, similar to the finance lease under ASC 842. As a result, implementing IFRS 16 affects lessee income statements in addition to the balance sheet. Under this standard, lessor accounting is substantially unchanged.

GASB 87

Under GASB 87 lessors record a lease receivable and a deferred inflow of resources at the commencement of the lease term. A lease receivable is calculated as the present value of the lease receipts expected during the lease term. Similar to IFRS 16, there is only one type of lease for all leases, similar to the finance lease under ASC 842.

Lessees, however, are required to recognize a lease liability and a lease asset at the commencement of the lease term. The lease liability is the present value of future payments expected to be made over the course of the lease, and the leased asset, representing the lessee's right to use the leased property, is measured as the initial amount of lease liability. This also includes any payments made to the lessor at or before the time of commencement of the lease and minus any lease incentives received from the lessor. The lease asset is then amortized over the shorter of the lease term or the useful life of the underlying asset.

Why Software Is the Best Option for Lessee vs. Lessor Accounting

Documenting lessee vs. lessor information on your financials can be difficult. With guidelines getting increasingly complicated for both lessors and lessees when it comes to documenting their leasing financials, using software to quickly and accurately calculate leases is becoming more popular. LeaseCrunch provides software that does lease accounting for you. Our software is:

Efficient

Never again do a manual calculation for lease accounting. With that, eliminate manual data entry errors and increase the accuracy of your financial statements.

Easy To Use

Our software crunches the numbers behind the scenes, meaning the extent of your work is interacting with our user-friendly interface and in-line resource guide.

Customizable

Our software is completely scalable to your business size, no matter how small or large.

Secure

We have embedded security measures in our software to keep your financial data safe.

Developed By Experts 

LeaseCrunch is founded collaboratively by CPAs who have lived in both the public accounting and private industry world, along with software professionals who ensure our ease of use, accuracy, and security protocols are paramount throughout the software.

Not looking forward to calculating journal entries and extensive disclosures under the lessee vs. lessor accounting standards? Let us deal with it. Try out our software and learn how simple it all can be. Reach out to us today for a demo. 

Frequently Asked Questions

What Are the Rights of a Lessee?

In a lessee vs. lessor agreement, the lessee has the right to use the leased property or equipment for the duration of the lease agreement. In return, they are obligated to make timely lease payments as outlined in the agreement, typically maintaining the asset and making sure it is in good condition, barring normal wear and tear.

What Is the Difference Between a Renter and a Lessee?

The term "lessee" is more commonly used in formal or legal contexts, including both real estate and equipment leasing. "Renter" or “tenant” is often used in more casual, everyday language, typically referring to someone leasing residential property. Lessee, renter, and tenant have essentially the same meaning. 

What Does Lessee Mean in Law?

In legal terms, a lessee is a person or entity who enters into a contract, known as a lease, with the owner of an asset (the lessor). This contract grants the lessee the exclusive right to use and occupy the asset for a specified period in exchange for regular payments. The lease contract binds the lessee to certain obligations, such as payment terms and maintenance responsibilities.

Is the Lessee the Owner of an Asset?

No, the lessee is not the owner of the asset. In a leasing agreement, the lessee is granted the right to use the asset for a specified time period, but the ownership remains with the lessor. The lessee makes regular payments for this usage, but at the end of the lease term, unless there's an option to purchase, the asset typically reverts back to the lessor.