Question

describe the three conditions that must be present to categorize a lease as a financial lease

Answer 1

A lessee clasifies a lease as finance lease if one or more of the below conditions are met:-

1) The ownership of property transfer to lessee at the end of the team of lease.

2) The lease contains a bargain purchase option.

3) The lease term is atleaset 75% of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease.

4) The present value of minimum lease payments (MLP) is atleast 90% of the fair value of leased property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease