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Sir, if the question says, that the legal title of the asset will be transferred to the lessee at the end of the lease agreement, is it ok to use the useful economic life to depreciate the asset even if it’s higher than the lease period.
Thanks.
Hi,
We go with the shorter of the lease term and economic life. If the lease term is longer then we are just using the asset without getting any economic benefit effectively as its economic life is complete.
Thanks
That’s true sir. But recently I found a question which specifically says that the legal title of the asset is transferring to the lessee at the end of the lease period. In that question, the lease term is shorter than the economic life.
It’s obvious that we should take the shorter of the lease term and economic life. But in the answer, the depreciation was calculated using economic life though it’s longer than the lease term. That’s why I was a bit confused.Thanks,
Charuka.Hi Charuka,
If we take legal title at the end of the lease period then the lease term is longer than the initial lease period, it is effectively indefinite, and so the economic life is then shorter.
Hope that clears it up.
Thanks
Chris
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