Many municipalities act as lessees. The lessee gets to access and use an asset they might not have the funds to purchase. For example, a city hall may lease a copy machine.
Meanwhile, the same municipality may act as a lessor in another transaction. Lessors can use a lease to turn an unused asset into an income source by receiving rental payments. For example, the city may rent unused municipal space to citizens to hold weddings and family gatherings.
Example:
A municipality lacks the capital to purchase a needed copier. It decides to lease used equipment from an electronics copier company in exchange for rent payments.
The municipality, as a lessee, now has the equipment it needs without purchasing. The lessor now earns revenue from its asset without having to sell it.
The lease agreement’s conditions determine how the transaction is recorded in the company’s financial statements. Some lease types include short-term leases, contracts that transfer ownership, sale-leaseback, and lease-leaseback transactions.
Short-term leases can last for a maximum possible term of 12 months, including extension options, regardless of the probability of options exercise. This includes month-to-month leases.
Contracts that transfer ownership transfer the underlying asset — such as the machinery or vehicle leased — to the lessee at the end of the lease contract. These must meet other criteria as well.
Sale-leaseback transactions involve selling an asset to another party, then leasing the asset back from that party. This may occur when the seller needs to liquidate the asset but still needs to use the asset.
Lease-leaseback transactions occur in construction. A landowner will lease the land to a developer to develop the land. The developer then leases the development back to the original landowner.
Government accounting uses several types of leases. A lease agreement can benefit both the lessee and the lessor.