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hey there, i was going through leases chapter, and i read that depreciation for finance lease to be calculated on the shorter of
1.expected useful life
2.lease term.my question is first that i dont understand this concept why shorter of these both, second if i have understoodthe concept of economic substance over form, than this statement conflicts with the theory. how, let me explain,
legaly the asset has been obtaind for the lease term, so it could be considered as its lease term, but economicalythe asset has its own economic life, and if the assetis of the lessee non current asset, than why use shorter of useful life and lease term,whynot simply use assets useful life?.. please assist me through this…Hi,
Say, asset’s useful life is 5 years.if your lease agreement is for 10 years, you should depreciate it over 5 years. The asset won’t be “asset” after 5 years term (it won’t bring economic benefits after its useful 5 years term). Why would you lease it for 10 years?
From the other side. If your lease agreement is for 3 years (and you will recognise asset as non-current asset for 3 years in your accounts), you should depreciate it for 3 years. After 3 years term you won’t have an asset in your book, so you can’t have depreciation – it won’t be match..
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