An Example To Illustrate How To Classify A Lease As Finance Lease
Below example demonstrate how to classify a lease into a finance lease:
Question:
ABC Ltd enters a lease agreement on 1 January 2009 to have the right to use the asset for 10 years. The economic life of the asset is 11 years. The fair value of the asset is $12 million. The lessee agreed to pay $1.6 million annually for 10 years at the beginning of each year. The present value of the minimum lease payment is $10.5 million.
Required: How should the lease be classified?
Answer:
On the inception date 1 January 2009, the lease will be classified as a finance lease due to:
- the lease period is 10 years, which is 91% of the economiclife of the asset. Therefore it meets the criteria being the lease forms the major part of the economic life of the assets, even if its title is not transferred
- the present value of the minimum lease period is substantially all (87.5%) of the fair value of the asset
The asset will be depreciated over 10 years.
- Sale And Leaseback-How To Determine whether it is A Finance Lease or Operating Lease And Accounting Treatment
- Understand The Differences Between Finance Lease And Operating Lease
- Characteristic Of Finance Lease
- Accounting For Finance Lease
- Technical Summary Of IAS 17 Leases
- Technical Summary Of IAS 40 Investment Property
- Medium Term Financing- Hire Purchase and Leasing Facility (Part 1)
December 2, 2009
Tags: Finance Lease, finance lease example
Posted in: Accounting for Lease
Leave a Reply