AKP enterprises have negotiated a lease for a photocopier. The useful life of the asset is eight years. The lease is non-cancellable and provides that the term of the lease is over three years with the present value of the lease payments being 55% of the fair value. Title will not pass at the end of the lease period. Using the criteria in AASB 117, the lease would definitely constitute a finance lease.

Question

Quizplus · Accepted Answer

According to AASB 117, for a lease to be classified as a finance lease, it must substantially transfer all the risks and rewards incidental to ownership to the lessee. The given scenario does not meet the key criteria such as transfer of ownership by the end of the lease term, lease term covering a major part of the asset's economic life, or the present value of lease payments amounting to at least substantially all of the fair value of the leased asset. Since the lease term is only three years for an asset with a useful life of eight years and title does not pass, it does not definitively meet the criteria for a finance lease classification.

AKP Enterprises Have Negotiated a Lease for a Photocopier