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please are finance leases to be treated as financial liabilities under financial instruments IAS 39, IFRS 9 etc? if no, why is the fair value of the lease asset used in most examples rather than the Present value of minimum lease payment (lease rentals discounted) where this is lower than the fair value of the asset, am a lot confused, please help
Hi,
A finance lease does meet the definition of a financial liability as there is an obligation to pay cash. We don’t really discuss it as ever being treated as a financial instrument, even though technically we are treating it using amortised cost.
In most examples the fair value and PVMLP are usually both very similar in value. If you were the lessor leasing out the asset to the lessee you would want to make sure that the payments you receive in present value terms are at least equal to the value of the asset.
The standard requires you to go with the lower of the two values as this is what we would be doing from an economic realty perspective. If the PVMLP is lower it is usually because the lease is shorter than the asset’s economic life and so we would receive a smaller payment from the lessee as there is potential for the lessor to lease the asset out again on its return and recover the rest of the fair value.
Don’t stress too much about the reasoning behind the rules, just ensure that you know the rules and are able to apply them.
Thanks
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