Lessee vs Lessor: Understanding Roles and Solutions with Black Owl Systems

Lessee vs Lessor: Key Differences in Roles and Lease Accounting

The lessor owns an asset and grants the right to use it. The lessee pays for that right of use over an agreed term. That one-sentence definition covers the legal relationship. The accounting gets more involved. Under ASC 842, IFRS 16, and ASPE 3065, the same lease contract produces very different entries depending on which side of it you sit on. A lessee records an obligation. A lessor records either a receivable or ongoing rental income, depending on how the lease is classified.

This guide covers both roles, how each side accounts for a lease under the major standards, and a worked example that follows a single lease through both sets of books.

What Is a Lessor?

A lessor is the party that owns the underlying asset, or controls the right to lease it, and transfers the right to use it to another party for a period of time in exchange for payment. Lessors include commercial landlords, equipment leasing companies, vehicle fleet providers, banks and captive finance arms, manufacturers that lease their own products, and businesses that sublease space they no longer need.

Contractually, the lessor sets the lease terms, collects payments, and usually keeps legal title. Whether the lessor or the lessee handles maintenance, insurance, and taxes depends on the contract. A gross lease puts more of those costs on the lessor. A net or triple-net lease shifts them to the lessee.

What Is a Lessee?

A lessee is the party that obtains the right to control the use of an identified asset for a period of time and pays the lessor for it. Lessees range from a retailer renting a storefront to a mining company leasing a haul truck fleet to an energy company leasing compressors and field equipment.

The lessee gets the economic benefits of using the asset without buying it outright. In return, the lessee takes on a payment obligation and must follow any use restrictions the contract imposes, such as mileage caps, permitted-use clauses, or return-condition requirements.

Lessee vs Lessor at a Glance

Why the Standards Changed for Lessees but Not for Lessors

Under the old rules (ASC 840 in the U.S. and IAS 17 internationally), most leases classified as operating leases stayed off the lessee’s balance sheet. Companies could carry large, long-term rent and equipment commitments that only appeared in the footnotes. ASC 842 and IFRS 16 were written to close that gap, so nearly all of the major changes landed on lessees.

ASC 842 took effect for U.S. public business entities in fiscal years beginning after December 15, 2018, and for private companies in fiscal years beginning after December 15, 2021. IFRS 16 took effect for annual periods beginning on or after January 1, 2019. Canadian private enterprises reporting under ASPE 3065 were not part of that overhaul and still use the older capital-versus-operating model.

Both frameworks largely carried over lessor accounting from the old standards. That does not mean lessors were untouched, though. ASC 842 aligned lessor classification criteria with the lessee criteria, narrowed the definition of initial direct costs, changed how lease and non-lease components are separated, and expanded disclosure requirements. ASU 2021-05 added a rule that lessors must classify certain leases with variable payments as operating leases if sales-type or direct financing classification would produce a loss at commencement.

How Lessees Account for Leases

Under ASC 842

At commencement, a lessee records a lease liability equal to the present value of the remaining lease payments, discounted at the implicit rate if it can be determined, or at the lessee’s incremental borrowing rate if it cannot. Private companies may elect a risk-free rate. The lessee also records a right-of-use asset, which starts at the lease liability amount, adjusted for prepaid lease payments, lease incentives received, and initial direct costs.

The lessee then classifies the lease as a finance lease or an operating lease. A lease is a finance lease if any one of five criteria is met: ownership transfers by the end of the term, the lessee has a purchase option it is reasonably certain to exercise, the term covers the major part of the asset’s remaining economic life, the present value of payments amounts to substantially all of the asset’s fair value, or the asset is so specialized it has no alternative use to the lessor at the end of the term. If none apply, it is an operating lease.

The classification changes the income statement but not the balance sheet. A finance lease produces interest expense on the liability plus separate amortization of the ROU asset, which front-loads the total cost. An operating lease produces a single straight-line lease cost. The difference between finance and operating leases also affects EBITDA and where payments land on the cash flow statement. Leases of 12 months or less with no purchase option the lessee is reasonably certain to exercise can be kept off the balance sheet under the short-term lease election.

Under IFRS 16

IFRS 16 drops the operating-versus-finance split for lessees entirely. Every lease within scope goes on the balance sheet as an ROU asset and lease liability, and every lease produces depreciation plus interest expense. Lessees can elect exemptions for short-term leases and leases of low-value assets.

Under ASPE 3065

Canadian private enterprises classify leases as capital leases (on the balance sheet) or operating leases (off the balance sheet). Operating lease payments are simply expensed, so the gap between ASPE and the other two frameworks is widest on the lessee side.

How Lessors Account for Leases

Under ASC 842

A lessor uses the same five criteria as a lessee. If any one is met, the lease is a sales-type lease. The lessor derecognizes the underlying asset, records a net investment in the lease (the lease receivable plus any unguaranteed residual asset), recognizes any selling profit or loss at commencement, and then earns interest income over the term.

If none of the five criteria is met, the lessor checks two more conditions. If the present value of the lease payments plus any residual value guaranteed by the lessee or a third party equals substantially all of the asset’s fair value, and collection is probable, the lease is a direct financing lease. The accounting is similar to a sales-type lease, except that any selling profit is deferred and recognized over the term rather than at commencement. A selling loss is still recognized right away.

Everything else is an operating lease. The lessor keeps the asset on its balance sheet, continues to depreciate it, and recognizes lease income, generally on a straight-line basis.

Under IFRS 16 and ASPE 3065

IFRS 16 lessors classify leases as finance leases or operating leases, using indicators that closely resemble the ASC 842 criteria. Manufacturer or dealer lessors recognize selling profit at commencement on finance leases. ASPE 3065 lessors use sales-type, direct financing, and operating classifications, similar in structure to U.S. GAAP.

Lessor accounting is where many teams run into trouble. Spreadsheets and lessee-focused software often handle the receivable side poorly, especially with implicit rate calculations, residual values, and multi-level subleases.

One Lease, Both Sides: A Worked Example

Assume Harbor Equipment Co. (the lessor) leases a piece of industrial equipment to Ridgeline Logistics (the lessee). The lease has a five-year term with payments of $20,000 at the end of each year. The rate implicit in the lease is 6%, and Ridgeline knows that rate. The equipment has a fair value of $84,247, a carrying amount of $80,000 on Harbor’s books, and an economic life of six years. There is no purchase option or residual value guarantee, and there are no initial direct costs.

The present value of five $20,000 payments at 6% is $84,247. Because the term covers most of the equipment’s economic life and the present value equals its fair value, the classification criteria are met for both parties.

Ridgeline’s books (lessee, finance lease under ASC 842). At commencement, Ridgeline records an ROU asset and a lease liability of $84,247. In year one, it records interest expense of $5,055 (6% of $84,247) and straight-line amortization of the ROU asset of $16,849, for a total year-one expense of $21,904. The $20,000 payment reduces the liability to $69,302. If the same lease had failed every criterion and been an operating lease, Ridgeline would carry the same ROU asset and liability but would record a single lease cost of $20,000 per year.

Harbor’s books (lessor, sales-type lease under ASC 842). At commencement, Harbor removes the $80,000 equipment from its balance sheet, records a net investment in the lease of $84,247, and recognizes $4,247 of selling profit. In year one, it earns interest income of $5,055, and the $20,000 receipt reduces the net investment to $69,302. Had the lease been an operating lease, Harbor would have kept the equipment, kept depreciating it, and recognized $20,000 of lease income each year.

The two sets of entries mirror each other in structure, but they sit in different accounts and follow different rules. A company on both sides of leasing, such as a lessee that subleases part of its space, has to run both models at once. For the full set of entries on each side, see our guide to lease accounting journal entries.

When You Are Both Lessee and Lessor

Subleases are the most common situation where one entity holds both roles. The original lessee becomes an intermediate lessor. It keeps its own ROU asset and lease liability on the head lease and accounts for the sublease as a lessor, classifying it by reference to the underlying asset under ASC 842, or by reference to the ROU asset under IFRS 16. Sale-leaseback transactions create a similar dual position, where the seller becomes the lessee and the buyer becomes the lessor. Our ASC 842 sale-leaseback guide walks through both sides.

Lease changes add more complexity. A modification, extension, or early termination has to be reassessed and remeasured on both sides, and the lessee and lessor rules for lease modifications and reassessments are not symmetrical.

Managing Lessee and Lessor Accounting in One System

Most lease accounting tools were built around the lessee problem that ASC 842 created, and lessor functionality was added later, if at all. That becomes a real limitation for equipment lessors, real estate owners, transportation and energy companies with sublease portfolios, and any group with intercompany leases where one entity’s lessee position is another entity’s lessor position.

Black Owl’s lease accounting software handles both sides in a single platform. On the lessee side, it calculates ROU assets and lease liabilities, classifies leases under ASC 842, IFRS 16, and ASPE 3065, and generates journal entries and disclosures. On the lessor side, it classifies sales-type, direct financing, and operating leases, calculates the implicit rate from the contract terms, tracks multi-level subleases, and automates interest income and receivable schedules. Modifications, reassessments, and terminations flow through both sets of books with a full audit trail, and the platform is SOC 1 and SOC 2 Type 2 certified.

If your team manages ten or more leases on either side of the relationship, book a demo to see how lessee and lessor accounting run together.

Frequently Asked Questions

Is the landlord the lessor or the lessee?

The landlord is the lessor. The landlord owns the property and grants the right to use it, and the tenant is the lessee. “Landlord” and “tenant” are real estate terms, while “lessor” and “lessee” apply to any leased asset, including equipment, vehicles, and aircraft.

Is a tenant the same as a lessee?

A tenant is a lessee of real property. Every tenant is a lessee, but not every lessee is a tenant, because a company leasing a fleet of trucks or a piece of medical equipment is a lessee without being a tenant. For accounting purposes, the distinction does not matter. A commercial tenant applies the same lessee rules under ASC 842 or IFRS 16 as any other lessee.

Who is the lessor and lessee in a car lease?

In a car lease, the lessor is usually the leasing company or the financing arm of the manufacturer, not the dealership that arranged the deal. The driver or business using the car is the lessee. The lessee makes monthly payments, follows mileage and wear limits, and returns or buys the vehicle at the end of the term.

Does the lessor or lessee pay for maintenance?

It depends on the lease. Under a gross lease, the lessor typically covers maintenance, property taxes, and insurance. Under a net or triple-net lease, those costs pass to the lessee. In equipment leasing, maintenance usually falls on the lessee unless the contract bundles a service component. Under ASC 842, a bundled maintenance service is a non-lease component that may need to be separated from the lease payments.

Does the lessee or lessor record the asset on the balance sheet?

Under ASC 842 and IFRS 16, the lessee records a right-of-use asset for nearly every lease. The lessor keeps the underlying asset on its balance sheet only for operating leases. For sales-type, direct financing, and IFRS 16 finance leases, the lessor removes the asset and records a net investment in the lease. Under ASPE 3065, lessees record operating leases off the balance sheet.

Can a company be both a lessee and a lessor?

Yes. A company that subleases part of a leased space, leases equipment to customers while leasing its own facilities, or completes a sale-leaseback holds both roles. It has to apply lessee accounting to the leases it holds and lessor accounting to the leases it grants, often on related contracts.