Yakub02
Banned
It is not always obvious why the above circumstances indicate that a lease is a finance lease.
This aspect provides an explanation on some of these. To understand these it is useful to think of the terms from the lessor’s viewpoint. Bargain purchase option If a lease includes a term whereby the lessee can buy the leased asset at a bargain price at the end of the lease that lease is a finance lease.
If the lessor includes this term in the lease the lessor would expect the lessee to take advantage of it. Therefore the lessor knows that it needs to make sure to recover the cost of the asset together with any related interest during the lease term.
The rentals and final sale price are set at a level which allows it to do this. Therefore, the lessee will pay the full cash price of the asset together with related finance expense over the lease term. The lessee would only do this if it had access to the risks and benefits of ownership.
In substance, this is just like borrowing the cash and buying the asset. Therefore, the lease is a finance lease.
If the lessor includes this term in the lease the lessor knows that when the asset is given back to it at the end of the lease, the asset will only have a small value
This aspect provides an explanation on some of these. To understand these it is useful to think of the terms from the lessor’s viewpoint. Bargain purchase option If a lease includes a term whereby the lessee can buy the leased asset at a bargain price at the end of the lease that lease is a finance lease.
If the lessor includes this term in the lease the lessor would expect the lessee to take advantage of it. Therefore the lessor knows that it needs to make sure to recover the cost of the asset together with any related interest during the lease term.
The rentals and final sale price are set at a level which allows it to do this. Therefore, the lessee will pay the full cash price of the asset together with related finance expense over the lease term. The lessee would only do this if it had access to the risks and benefits of ownership.
In substance, this is just like borrowing the cash and buying the asset. Therefore, the lease is a finance lease.
If the lessor includes this term in the lease the lessor knows that when the asset is given back to it at the end of the lease, the asset will only have a small value
