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Leases

In: Business and Management

Submitted By whereford
Words 648
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Lessee Ltd leased equipment from Lessor Inc. Lessee Ltd. applied IFRS. The accounting treatment for this lease requires an analysis of several factors. We have received analysis from two accountants. Each analysis is incorrect. Our objective is to determine the proper accounting treatment for the lease.
1. Was the junior accountant’s analysis correct? Why or why not?
The junior accountant has opinioned that the lease is an operating lease. He has reasoned that it is an operating lease because the equipment reverts to Lessor, Inc. at the conclusion of the lease term. This assertion would be correct if it were the only factor.
However, International Accounting Standard (IAS) 17 (2010) lists “Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease” There are two other situations that qualify this lease as a financing lease. The lease term is a major part of the economic life of the asset. The lease term is 3 years. The useful life is four years. The present value of the lease payments amounts to at least substantially all of the fair value of the leased asset. The present value of the leased payments is $248,690. The fair value of the equipment is $265,000. the lease term is for the major part of the economic life of the asset even if title is not transferred; International Accounting Standard 17 (2010 states “Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are (a) the lease term is for the major part of the economic life of the asset even if title is not transferred; and (d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset substantially all of the fair value of the leased asset.”

2. Was the senior accountant’s...

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