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Operating lease or Finance lease? Need your help
04-02-2009, 05:53 PM
Post: #3
 
Dear all,

I m giving my point of view on the basis of my limited knowledge.

Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form. Situations that would normally lead to a lease being classified as a finance lease include the following

<b>1</b> the lease transfers ownership of the asset to the lessee by the end of the lease term;

No such condition prescribed

criteria not met

<b>2</b> the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised;

Lemon Ltd does not intend to buy the bulldozer at the end of the lease term.

criteria not met

<b>3</b> the lease term is for the major part of the economic life of the asset, even if title is not transferred;

Lease period is 62.5% of the economic life of the asset which is not major part of the life. IAS has not defined the word "major" anywhere however, in US GAAP it is the 75% or more.

criteria not met

<b>4</b> at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and

Substantially is also not defined in IAS, however as per US GAAP it is more than 90%. Present value comes 89.42% (Rupees 31,117) which is not substantially equal to the fair value at the inception of the lease.

criteria not met

<b>5.</b> the lease assets are of a specialised nature such that only the lessee can use them without major modifications being made.

Not applicable

criteria not met

Other situations that might also lead to classification as a finance lease are

<b>6.</b> If the lessee is entitled to cancel the lease, the lessor's losses associated with the cancellation are borne by the lessee;

The lease is cancellable, but a penalty equal to 50% of the total lease payment is payable on cancellation. Lessor understands that the loss would be 50%

Criteria met

<b>7. </b> gains or losses from fluctuations in the fair value of the residual fall to the lessee (for example, by means of a rebate of lease payments); and

No such condition prescribed

criteria not met

<b>8.</b> the lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than market rent.

No such condition prescribed

criteria not met

Regards,

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Messages In This Thread
[] - kamranACA - 04-01-2009, 08:40 PM
[] - Star - 04-02-2009 05:53 PM
[] - huu_tung87 - 04-02-2009, 06:24 PM
[] - Star - 04-02-2009, 07:39 PM
[] - huu_tung87 - 04-02-2009, 07:55 PM
[] - Star - 04-02-2009, 08:12 PM
[] - kamranACA - 04-03-2009, 01:51 AM
[] - NYP - 04-25-2009, 02:19 PM
[] - Star - 04-25-2009, 06:26 PM
[] - NYP - 04-25-2009, 07:04 PM
[] - Star - 04-27-2009, 02:40 PM
[] - Abdur.Rehman - 04-29-2009, 07:05 AM
[] - wsafca1 - 08-12-2009, 01:35 AM
[] - wsafca - 08-13-2009, 04:35 AM
[] - kamranACA - 08-13-2009, 07:44 PM
[] - wsafca - 08-14-2009, 02:14 AM
[] - kamranACA - 08-14-2009, 03:16 AM
[] - wsafca - 08-14-2009, 05:47 PM
[] - faisal_desperado - 08-15-2009, 01:06 AM
[] - kamranACA - 08-15-2009, 03:13 AM
[] - wsafca - 08-15-2009, 05:00 PM
[] - wsafca - 08-15-2009, 05:04 PM
[] - wsafca - 08-15-2009, 05:55 PM
[] - kamranACA - 08-15-2009, 06:08 PM
[] - kamranACA - 08-15-2009, 06:10 PM
[] - wsafca - 08-15-2009, 06:29 PM
[] - kamranACA - 08-15-2009, 06:48 PM
[] - faisal_desperado - 08-15-2009, 07:11 PM
[] - kamranACA - 08-15-2009, 07:26 PM
[] - wsafca - 08-15-2009, 10:31 PM
[] - kamranACA - 08-15-2009, 11:42 PM
[] - wsafca - 08-16-2009, 05:01 PM
[] - wsafca - 08-16-2009, 05:20 PM
[] - wsafca - 08-16-2009, 05:36 PM
[] - kamranACA - 08-16-2009, 09:00 PM
[] - wsafca - 08-16-2009, 11:19 PM
[] - kamranACA - 08-17-2009, 01:24 AM
[] - wsafca - 08-18-2009, 01:24 AM
[] - kamranACA - 08-18-2009, 05:20 AM
[] - wsafca - 08-19-2009, 12:16 AM
[] - kamranACA - 08-19-2009, 03:33 AM
[] - kamranACA - 08-19-2009, 03:37 AM
[] - applejo88 - 03-17-2011, 07:16 PM

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