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Operating lease or Finance lease? Need your help
08-15-2009, 05:00 PM
Post: #22
 
Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are

(As you already quoted)

11. Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease are

(Written in link you have given)

I think you could not read paragraph 12 which is reproduced below

12. The examples and indicators in paragraphs 10 and 11 are not always conclusive. <b>If it is clear from other features that the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is classified as an operating lease.</b> For example, this may be the case if ownership of the asset transfers at the end of the lease for a variable payment equal to its then fair value, or if there are contingent rents, as a result of which the lessee does not have substantially all such risks and rewards.

three things to mention

1) the bold line suggest that the concept, if the case meets any one of the examples (i wouldn't say critaria), it is finance lease, is wrong.Please reconsider!

1) Main critaria is whether risks and rewards have been transferred or not.

2)to evaluate or conclude whether risks and rewards have been transferred or not, the above mentioned examples may be used.

The above circumstances clearly indicates that we have to classify the lease in accordance with concept, Whether risks and rewards have been transferred or not.

Then we have to move forward and understand what does it mean!

So for i am talking in general terms not specific to the question being putup. Because it is not yet determined what critaria should be considered to evaluate.

Your "definition" para of risks and rewards is relevent and shall be used further in discussion.

Example

Suppose in one lease arrangement of 5 years (useful life of the asset being 8 years) PV of MLP becomes equal to its FV. penalty equal to 50% of the total lease payment is payable on cancellation.

Your two critaria being met may be 3

If the agreement includes a clause that, idle capacity losses will be borne by the lessor and similarly extra production benefit will also be enjoyed by the lessor. and the lesse has to return the asset at the end of the lease term. Repairs and maintenace costs will also be borne by the lessor.

Is it finance lease?? I dont think so.

No matter all the Examples are met main critaria is Whether Substantial risks and rewards have been transferred.

Further

Exact difinition of risks and rewards is not give i standards. In IFRIC meeting i quoted earlier the issue was also discussed in the context of IAS 18, as written in minutes
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[] - kamranACA - 04-01-2009, 08:40 PM
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