Financial Accounting Review: What IAS 17 says about Finance Lease in the Lessee's Perspective?

Per IAS 17, any of the following situations will lead to the lease being classified as a finance lease:

1. Ownership of the leased asset is transferred to the lessee at the end of the lease term.

2. The lessee is entitled to a bargain purchase option.

3. Even if title is not transferred, the lease term is for the major part of the economic life of the asset.

4. The present value of the minimum lease payment amounts to substantially all of the fair value of the leased asset at the inception of the lease.

Other criteria:

a. The leased asset has a specialized nature that only the lessee can use it without major modification.

b. If the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee.

c. Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee.

d. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.