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In a finance lease, if the lease rental payment is made in advance, does this also mean that the finance charge (interest payment) on the outstanding amount for the period on the finance lease will also be paid in advance?
No
The first instalment is the equivalent of a deposit and carries no interest element within it.
The asset is then leased for a year so interest is accruing throughout that year.
Along comes the year end, and we haven’t paid the second instalment – it’s not due until tomorrow.
So, at the year end there will be “Finance lease interest” and “Depreciation” within the Statement of Income and, in the Statement of Financial Position, there will be:-
TNCA at cost less one year’s depreciation
Long term liability – the capital amount of the obligation to the finance lease lessor payable more than 12 months hence
Current liabilities – the accrued finance lease interest for the year just ended, and
– Finance lease creditor amount representing the next instalment ( payable tomorrow ) less the interest accrued for this current year just endedDoes that help?
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2012 -Revised IAS 17 leases
The recognition of operating and finance lease using a right of use model.
Does this mean now the operating lease should be treated in the same as finance lease in SOFP
And what do the off balance sheet statement state in relation to the revision.Any clarification would be of great help
There is on-going debate about the appropriate treatment for operating leases. May I suggest that you look at the relevant article in Student Accountant – I think it’s in September 2012 edition
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