Understanding ASPE
Section 3065,
Leases
Four questions for private business owners:
Leases
A better working world begins with better questions. Asking better questions leads to better answers. To help preparers
of financial statements with Canadian accounting standards for private enterprises (ASPE) Section 3065, Leases, we’ve
summarized the key aspects of the Section and offer relevant practical considerations for private mid-market companies
through answering four commonly asked questions.
Section 3065.03(n) defines a lease as the
conveyance, by the lessor to a lessee, of the right
to use a tangible asset, usually for a specified
period of time in return for rent. Licensing
agreements for intangible assets such as patents
and copyrights are specifically excluded from the
scope of Section 3065. However, the accounting
for these agreements is often, but not always,
analogous to leases.
Section 3065 classifies leases into the four
classifications as defined below:
 Capital lease: a lease that, from the point of
view of the lessee, transfers substantially all
the benefits and risks incident to ownership of
property to the lessee
 Operating lease: a lease in which the lessor
does not transfer substantially all the benefits
and risks incident to ownership of property
 Sales-type lease: a lease that, from the point
of view of the lessor, transfers substantially all
the benefits and risks incident to ownership of
property to the lessee and, at the inception of
the lease, the fair value of the leased property
is greater or less than its carrying amount,
thus giving rise to a profit or loss to the lessor
(usually a manufacturer or dealer)
 Direct financing lease: a lease that, from
the point of view of the lessor, transfers
substantially all the benefits and risks incident
to ownership of property to the lessee
and, at the inception of the lease, the fair
value of leased property is the same as its
carrying amount to the lessor (usually not a
manufacturer or dealer)
2 | Understanding ASPE Section 3065, Leases
2
Question
Question
1
What is a lease arrangement?
What does “transfer substantially all the
benefits and risks incident to ownership”
mean?
Per Section 3065.06, the following are conditions
that may indicate a transfer of all of the benefits
and risks of ownership to the lessee:
 There is reasonable assurance that the lessee
will obtain ownership of the leased property by
the end of the lease term, generally evidenced
by a bargain purchase option
 The lease term exceeds 75% of the economic
life of the leased property
 The present value of the minimum lease
payments exceeds 90% of the fair value of the
leased property. The amounts that comprise
the minimum lease payments differ from the
perspective of the lessor and the lessee and
are described in paragraphs 3065.03(r)(i)
and 3065.03(r)(ii)
If any of these conditions are met, the lease is not
classified as an operating lease.
Per Section 3065.07, from the point of view of a
lessor, in addition to any one of the items above,
a lease normally transfers substantially all of
the benefits and risks of ownership to the lessee
when, at the inception of the lease, both of the
following conditions are present:
 The credit risk associated with the lease is
normal when compared to the risk of collection
of similar receivables
 The amounts of any unreimbursable costs that
are likely to be incurred by the lessor under the
lease can be reasonably estimated
Question
3
How are operating leases accounted for?
Operating lease payments are recognized as an
expense on a straight-line basis over the term of the
lease or another basis representative of the time
pattern in which the user derives benefit from the
leased asset. Depending on the terms of the lease
arrangement (e.g., when the lease contains rent
escalation), this may result in rent expense that
differs from the amount of cash paid.
Lease arrangements may include incentives for a
lessee to sign the lease, such as an initial up-front
cash payment to the lessee, an initial rent-free
period, the reimbursement of costs of the lessee such
as moving costs or leasehold improvements, or the
assumption by the lessor of the lessee’s pre-existing
lease. Per Section 3065.27, lease inducements are
an inseparable part of the lease agreement and,
accordingly, are accounted for as reductions of the
lease expense over the term of the lease.
Question
4
What are the steps in accounting for a capital
lease from the perspective of the lessee or a
sales-type or direct financing lease from the
perspective of the lessor?
Lessee: capital lease
 The asset value and the amount of the obligation,
recorded at the beginning of the lease term,
are equal to the present value of the minimum
lease payments discounted using the lower of
the lessee’s incremental borrowing rate and the
interest rate implicit in the lease. The asset value
and the amount of the obligation are limited to the
fair value of the leased asset (Section 3065.16).
 The leased asset is amortized over the period of
expected use. If the lease contains terms that
allow ownership to pass to the lessee or a bargain
purchase option, the period of amortization shall
be the economic life of the asset. Otherwise, the
property shall be amortized over the lease term
(Section 3065).
 An obligation under a capital lease is similar to
a loan. Lease payments shall be allocated to a
reduction of the obligation, interest expense and
any related executory costs (Section 3065.18).
Lessor: direct financing lease
 The leased asset is removed from the lessor’s
balance sheet, and the lessor’s net investment
in the lease — calculated as the minimum lease
payments receivable less any executory costs
and related profit included therein plus any
unguaranteed residual value of the leased property
accruing to the lessor less unearned finance
income remaining to be allocated to income over
the lease term — is recognized as an asset.
To learn more about
these items or for
application guidance
please contact our Private
Mid-Market practice at
privatecompanyinfo@
ca.ey.com.
 A direct financing lease gives rise to income in the
form of finance income, which is composed of the
difference between the following:
• The total minimum lease payments, net of any executory
costs and related profit therein, plus any guaranteed
residual value of the lease property accruing to the lessor
• The cost or carrying amount, if different, of the
leased property
Lessor: sales type lease
 The leased asset is also removed from the lessor’s
balance sheet, and the lessor’s net investment
in the lease, calculated as described above, is
recognized as an asset.
 A sales-type lease gives rise to two types of
income: the initial profit on the sale of the product
at the inception of the lease and finance income
over the lease term.
 The sales revenue recorded at the inception of
a sales-type lease is the present value of the
minimum lease payments net of any executory
costs and related profit included therein, computed
at the interest rate implicit in the lease. The cost
of sale recognized at the inception of the lease
is the cost or carrying value, if different, of the
leased property reduced by the present value of
the unguaranteed residual accruing to the lessor,
computed at the interest rate implicit in the lease.
 Finance income arising from a sales-type lease is
composed of the difference between the following:
• Total minimum lease payments, net of any executory
costs and related profit included therein, plus any
guaranteed residual value of the leased property accruing
to the lessor
• The aggregate of their fair present values
Understanding ASPE Section 3065, Leases | 3
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