Question

The concept of substance over form can be applied to leases. Which lease terms are most important to understanding the economic substance of the lease contract?

Answer 1

Solution:-

The concept of substance over form can be applied to leases. Which lease terms are most important to understanding the economic substance of the lease contract:-

Leases requires the preparers of financial statements to consider the substance of lease arrangements when determining the type of lease for accounting purposes.
For example, an asset may be leased to a lessee without the transfer of legal title at the end of the lease term. Such a lease may, in substance, be considered as a finance lease if for instance the lease term is substantially for entire useful life of the asset or the lease agreement entitles the lessee to purchase the asset at the end of the lease term at a very nominal price and it is very likely that such option will be exercised by the lessee in the given circumstances.

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