Go AD-Free with CAclubindia Pro and Daily WhatsApp Updates. Subscribe Now!

Lease - finance vs operating

amit gagrani (Job) (74 Points)

18 May 2012

I have a query on Lease transaction.

Whether it is compulsory condition of Finance Lease that at the end of the lease term Lessee should buy leased asset.

Further, to bifurcate a lease under Finance Lease, it is compulsory to put a condition that Lessee should buy the leased asset at the end of the lease period or the leased asset become the property of Lessee after the payment of last installment of Lease renral.

Please reply as per AS-19 "Accounting for Lease".

Reply
Follow
Share

1 Replies

Z (Tax Consultation (US and India)) (2970 Points)
Replied 18 May 2012

Its is not a necessary condition. Criteria is that substantially all the risks and rewards incedental to ownerships are transferred

text of AS-19

Para 6 of classification

A lease is classified as a finance lease if it transfers substantially all the

risks and rewards incident to ownership. Title may or may not eventually be

transferred. A lease is classified as an operating lease if it does not transfer

substantially all the risks and rewards incident to ownership.

Generally when mojarity of the conditions of para 8 are fulfiled then lease is considered as finance lease. So if say all the 3 conditions of para 8 are fullfiled but there is no option to purchase or theres is no transfer of ownership then also it could be a finance lease

8. Whether a lease is a finance lease or an operating lease depends on the

substance of the transaction rather than its form. Examples of situations

which would normally lead to a lease being classified as a finance lease are:

(a) the lease transfers ownership of the asset to the lessee by the

end of the lease term;

(b) the lessee has the option to purchase the asset at a price which is

expected to be sufficiently lower than the fair value at the date

the option becomes exercisable such that, at the inception of the

lease, it is reasonably certain that the option will be exercised;

asset even if title is not transferred;

(d) at the inception of the lease the present value of the minimum

lease payments amounts to at least substantially all of the fair