Finance Lease

Glossary

Finance Lease

A finance lease is one that transfers substantially all the risks and rewards incidental to ownership of an underlying asset and essentially depends on the substance of the arrangement. For example: - Ownership is transferred to the lessee by end of the lease term - There is a bargain purchase option which the lessee is likely to exercise - Lease term is for the major part of the economic life of the asset even if title is not transferred - At inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset In a finance lease, the lessor shall: - Derecognise the assets transferred to the lessee - Recognise a lease receivable at an amount equal to the net investment in the lease, this is the gross investment in the lease discounted at the rate implicit in the lease - Recognise interest income at a constant periodic rate on the net investment in the lease - Deduct rentals received from the lease receivables

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