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Operating lease or Finance lease? Need your help
08-14-2009, 03:16 AM
Post: #18
 
Dear,

The lease period is 5 years out of total 8 years life of the asset. IFRSs have not defined the term "major". However for certain cases it has established the meanings of "significant" and "controlling" etc. Due to this the meanings of major will be taken as generalized meanings ie "substantial" or "most of". We cannot go altogether out of the "framework of IFRSs" for this purpose. Apparently, 5 years period out of 8 years is significant, substantial, most of and major portion of useful life. This establishes that that lease if finance lease.

The present value of lease payments is quite nearest (96percent plus) of the fair value of the asset. This makes it finance lease.

In case lease is terminated by lessee they have to pay fifty percent of TOTAL LEASE PAYMENT as penalty forthwith (ie even without using such asset they will be paying 50 percent of TLP). Just imagine finance cost of paying half TLP forthwith. Since the penalty is huge there are extremely minimal chances of such cancellation and if done will cause the lesse to bear such a substantial amount of loss.

If 96 percent of the fair value is to be paid, and if most of (major) the useful life of asset has to be consumed incurring all the required repairs, maintenance and insurance costs etc (that are always lessee's responsibility) and if penalty for cancellation is huge making cancellation almost impossible then what else should be required to decide whether or not risk or reward has been transferred?

Remember IAS 17 require fulfilling of only one criteria out of the list provided by it for concluding the lease as finance.

In my view three parts of the criteria met clearly in the example.

Please note transferring the risks and rewards of ownership do not at all mean actual sale of the asset or a guaranteed purchase at the end of the lease term. Here the substance is the fundamental to take the decision and not the legal reality.

For clearing the confusion I advise you to study IFRIC 4 (interpretation) and then figure out what such transfer means in fact.

Thanks for replying!

Regards,


Kamran.
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[] - 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
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[] - 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
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