When you have worked out your contract and deemed it is more a finance rather an operating lease, you need consider it as your own asset. “Finance” essentially means that someone else financed the purchase of your asset. As a result, this ‘someone’ is leasing the asset out to you asking for a rental fee. In accounting this is called a finance lease liability as in essence you acquired an asset with third party resources.

As you no doubt can already figure out, the first steps are to recognize both the asset and the corresponding liability on the balance sheet. The very first entry is as follows:

Db PPE (into the group the asset most suits and in the amount yet to be paid for the asset)

Cr Finance lease liability (the amount yet to be paid for the asset)

With this entry you have recognized the asset as your own. Now a thing to watch out for is the depreciation. The asset is depreciated the same way as every other asset in the group it was recognized in. Also the useful lives are determined the same as to every other similar asset the company is holding. As a general rule though the useful life should never be longer than the rental period.

On your cash flows essentially with initial recognition nothing is really changing because you did not give out any cash apart from initial payment, which goes through operating income.

In summary, when you have classified the agreement as a finance lease, make sure you recognize both the asset and the liability on your balance sheet and obviously list the asset with proper depreciation rules.