- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
Good evening Sensei
i refer to page 77, section 4.3.5 of the above link
in the example given
the lease is for 10 years and the asset life is 15 years.
1. the equipment is not specialized and expected to have alternate use to lessor
2. the lease does not transfer ownership at end of lease
3. there is no option for the lessee to buy the assetthis lease is being classified as a finance lease solely based on the fact that the PV of the lease payments is substantially all of the FV.
in the exam, i wd have said it is an operating lease because there are more criteria that point to an operating lease.
so.. how do we decide??
what is the rule?
1. Is it that even if ONE of the criteria is met, then its a finance lease?
2. or the criteria given have some weightage? (like one criteria carries more weight)please shed light.
——————–
PS: i did post a question in P2 but the answer was too late…..
i have deep respect for you, John and Ken and for the 4 years i been seeking ur help….u guys always had/ or made the time to answerP2D2’s lectures are very good (better than yours by the way..:)) but lectures are a available on the net.. it has been your response on these forums that has made ot a darling of all those who are doing self study.
i wont ask many questions of u….only the ones where i am totally stuck.
regards
“i refer to page 77, section 4.3.5 of the above link”
There’s no page 77 nor paragraph 4.3.5 on this linked page!
From the brief information given I too would have classified it as an operating lease
Does the ‘lessee’ have sole rights of use of this asset throughout the ten year lease period?
Does the ‘lessor’ have any right of substitution?
Does the arrangement provide the ‘lessee’ with a ‘right-of-use’?
Extract from IASPLUS website on IFRS 16
“A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Otherwise a lease is classified as an operating lease. [IFRS 16:62]
Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: [IFRS 16:63]
the lease transfers ownership of the asset to the lessee by the end of the lease term
the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised
THIS NEXT ONE IS IMPORTANT FOR YOUR EXAMPLE
the lease term is for the major part of the economic life of the asset, even if title is not transferred
at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset
the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made”
It seems to me that 10 years out of 15 would suggest that this is not for the major part of the economic life of the asset so I’m sticking with my initial thoughts – it’s not a finance lease
Sorry to disappoint 🙁
- The topic ‘ifrs 16 leases’ is closed to new replies.