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Hi sir just to check with you whether my understanding is correct.
For a finance lease ,
-If ownership is transferred to the lessee at the end of the lease :
Depreciate asset over useful life of asset-If ownership is not transferred to the lessee at the end of the lease :
Depreciate asset over shorter of lease term and useful lifeIf for example, the question doesn’t state anything, and they tell us that the lease term is 5 years and the useful life is 6 years, we just assume that ownership is not transferred right ?
Then we depreciate the asset over the lease term of 5 years which is the shorter of the useful life and lease term.
Am i right sir ?
Yes … but there’s a moot point in all this. The definition of a finance lease includes the expression ‘… for substantially the whole of the asset’s estimated useful life…’ and ‘substantially’ is generally taken as being >= 90%
In your example, 5 years out of 6 is only 83.33% of its useful life so is it, in fact, a finance lease?
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