The term „leasing“ refers to a contractual relationship similar to rental and leasing agreements, which grants the lessee, in return for payment, a right to use the leased asset. Leases are not specifically defined under German GAAP. Instead the concept of economic ownership is applied to determine accounting treatment.

The Fiscal Code of Germany (Abgabenordnung – AO) § 39 states that Assets shall be attributed to the owner. If someone other than the owner exercises effective control over an asset in such a way that they can, as a rule, economically exclude the owner from influencing the asset for its normal useful life, the asset is to be attributed to them.

§ 246 HGB states that assets must be included in the owner’s balance sheet; if an asset is not economically attributable to the owner but to another owner, that owner must show it in its balance sheet.

It is generally accepted that a leased asset is recognised by the lessee (beneficial owner) and not by the lessor (legal owner), if the lessee is in substance exposed to benefits from the majority of the risks and rewards associated with the leased asset.

Under German GAAP the allocation of economic ownership of the leased asset is crucial for accounting for leasing transactions. There are no exemptions for short-term leases or leases of low-value assets.

The allocation of economic ownership is assessed based on German tax regulations that may differ from the finance vs operating lease classification for lessors under IFRS. A distinction is generally made between moveable and immoveable leased assets and fully amortised and partially amortised leases. The following practical benchmarks are provided in terms of IDW („Institut der Wirtschaftsprüfer in Deutschland“) guidance.

Full amortization contracts

For moveable assets and buildings, economic ownership is attributed to the lessee if:

• the basic rental period is less than 40% or more than 90% of the normal useful life
• the basic rental period is between 40% and 90% and there is a favourable lease extension option
• the basic rental period is between 40% and 90% and there is a favourable purchase option,
• the leased object is specially manufactured for the lessee and can therefore only be used by him

Otherwise, economic ownership remains with the lessor.

Land is attributed to the lessor, unless there is a purchase option for the developed property, then the land is allocated to the lessor or the lessee in accordance with the allocation of the building.

Partial amortization contracts

• Economic ownership is attributed to the lessee for moveable & immovable assets with a basic lease term of up to 90% of the normal useful life
• For contracts with specific options or obligations, special provisions apply

The core principle: who bears the residual value risk at the end of the lease term determines attribution.

At the commencement date, a lessee shall recognise a right-of-use („ROU“) asset and a lease liability. The ROU asset shall be measured at cost which is equal to the amount of the initial measurement of the lease liability + lease payments made before or at commencement date – lease incentives received + initial direct cost + an estimate of costs to dismantle/remove the underlying asset.

The lease liability shall be measured at the present value of the future lease payments discounted using the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate.

If economic ownership is allocated to the lessor – the lessee shall recognise lease payments on a straight-line bases over the lease term.

If economic ownership is allocated to the lessee, the lessee recognises a leased asset and corresponding lease liability at the present value of the lease payments at commencement date.

If the leased asset is economically attributed to the lessee, it is subsequently measured at cost less accumulated depreciation and accumulated impairment losses.

No revaluation model exists under German GAAP

After the commencement date, a lessee shall measure the lease liability by:

1. increasing the carrying amount to reflect interest on the lease liability;
2. reducing the carrying amount to reflect the lease payments made; and
3. remeasuring the carrying amount to reflect any reassessment or lease modifications or to reflect revised in-substance fixed lease payments.

At the commencement date, a lessor shall recognise assets held under a finance lease in its statement of financial position and present them as a receivable at an amount equal to the net investment in the lease. The underlying asset is derecognised and a lease receivable is recognised instead.

Subsequently, a lessor shall recognise finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease.

If the lessee is deemed to be the economic owner, the lessor derecognises the underlying asset and records a lease receivable in the amount of the present value of the lease instalments.

Subsequently, the lease instalments are split into a principal and an interest component. The principal component reduces the lease receivable without affecting profit or loss, while the interest component, as well as the income from the periodic compounding of the lease receivable, is recorded in the profit and loss statement.

Under an operating lease, the lessor recognises the underlying asset in its statement of financial position.

Subsequently, the underlying asset continues to be accounted for in accordance with applicable accounting standards.

A lessor shall recognise lease payments from operating leases as income on either a straight-line basis or another systematic basis.

If the leased asset is assigned to the lessor, the lessor, records the leased asset in its balance sheet.

Subsequently, leased assets are depreciated.

The lessor recognises lease payments as income over the lease term, generally on a straight-line basis.