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Hello,
IAS 17 states that a a finance lease can be presumed if the leased assets are of such a specialised nature that only the lessee can use them without major modifications being madeDoes this mean
a) That the lessee must first modify the leased asset before the lessee can use the leased asset
or
b) If another party, other than the lessee was to use the leased asset, then the other party would have to make major modifications to the assetPlease advise
Thanks
Liam FoleyHi Liam – of the two choices you have given me, it’s the second one!
But more likely, it could actually be the responsibility of the lessor to modify the asset at the end of an operating lease in order to put it into a condition where it can be leased again. If that cost of modification (at the inception of the “operating lease”) is estimated to be excessive, then the lessor could well say “I’m never going to recover that asset, modify it at great expense, and then lease it out again” Can you visualise that? So, at the start of the lease, the lessor will determine the terms under which he is prepared to lease the asset knowing in his own mind that the value of the asset needs to be recovered over the period of the “operating” lease because that asset will not have a useful life (without expensive modification) after the end of that “operating lease”
Thus, it’s effectively a finance lease
Clear?
Hi Mike,
Thanks for the reply and apologies for my tardy reply
So, are you saying that, the lessor, will set the rental payments at such a level over the “operating lease” term that, they (the rental payments and their present value) will equal all or substantially of the leased asset fair value at the inception of the lease – hence this is what will make it a finance lease??
Liam
It wouldn’t satisfy the criteria of “substantially the whole of useful life” so technically it isn’t a finance lease.
But because cost of recovery and extensive modification are so great, that exercise is unlikely to be carried out so lessor will set the lease payments at a level to recover investment in the asset.
Present value of minimum lease payments may satisfy the “substantial” criteria, but the lease term will not necessarily.
Nevertheless, it would classify as a finance lease
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