Finance lease

The key IFRS criterion is: If "substantially all the risks and rewards" of ownership are transferred to the lessee then it is a finance lease.

IFRS does not provide a rigid set of rules for classifying leases and there will always be borderline cases.

The classification of large transactions, such as sale and leasebacks of property, may have a significant effect on the accounts and on measures of financial stability such as gearing.

For a lessor, a lease is financed if any of the following five criteria (IFRS 16.63) are met: (a) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, that the option will be exercised; (c) the lease term is for the major part of the economic life of the underlying asset even if the title is not transferred; (d) at the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset; and (e) the underlying asset is of such a specialised nature that only the lessee can use it without major modifications.

ASC 842 also simplified the guidance For lessors by eliminating "leveraged type" leases.

AASB 117 'Leases' applies to accounting for leases other than (a) leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources; and (b) licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents, and copyrights.

The amount paid as interest during the lease period is shown on the Proprietary Limited DR side of the lessee.

The term sometimes means a special case of lease defined by Article 2A of the Uniform Commercial Code (specifically, Sec.