08-16-2009, 05:36 PM
The book Gripping IFRS also says
If the risks and rewards
a) are transferred from the lessor to the lessee, then the substance of the transaction is a purchase rather than a true lease; therefore a finance lease;
b) are not transferred from the lessor to the lessee, then the substance of the transaction is a true lease; therefore an operating lease.
In (a) above in substance it is purchase, but legally it is not. i think i understand this. Correct me if iam wrong.
I never said title has to pass to the lessee in order to classify a lease as Finance. No, I never
Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form and substance should be that of the purchase. It should look like that it is purchase but it actually may be not (may be only because the title is not passed). Take the horse give me the rentals and give me the horse back when it will die. all responsibility related to it is yours. In substance you have purchased the asset all RRs have been transfered, although scrap is not yours and title is still of the lessor, but it is finance lease. Horse may be plant. You will again say illogical example, but i think, convincing.
Regards
Waqas Shabbir
If the risks and rewards
a) are transferred from the lessor to the lessee, then the substance of the transaction is a purchase rather than a true lease; therefore a finance lease;
b) are not transferred from the lessor to the lessee, then the substance of the transaction is a true lease; therefore an operating lease.
In (a) above in substance it is purchase, but legally it is not. i think i understand this. Correct me if iam wrong.
I never said title has to pass to the lessee in order to classify a lease as Finance. No, I never
Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form and substance should be that of the purchase. It should look like that it is purchase but it actually may be not (may be only because the title is not passed). Take the horse give me the rentals and give me the horse back when it will die. all responsibility related to it is yours. In substance you have purchased the asset all RRs have been transfered, although scrap is not yours and title is still of the lessor, but it is finance lease. Horse may be plant. You will again say illogical example, but i think, convincing.
Regards
Waqas Shabbir
