ACCA SBR ^UK Syllabus C. Reporting The Financial Performance Of A Range Of Entities - Lessor Accounting - Finance Lease - Notes ^{8 / 11}

Is it a Finance Lease or an Operating Lease?

If the majority of the risks and rewards are transferred to the lessee then it's a finance lease

Other Indicators of a Finance Lease

1. Ownership transferred at the end

2. Option to buy at the end at less than Fair Value

3. Lease term is for majority of the asset's UEL

4. PV of future lease payments is close to the actual Fair Value of the asset

5. The asset is specialised and customised for the lessee

Finance Lease accounting

Dr Lease Receivable Cr Asset

What makes up the Lease Receivable?

1. PV of lease payments 

   (Fixed receipts, Variable receipts (based on index / rate), Residual Value guaranteed to receive, Exercise price to be received of any likely purchase option from the lessee, Any penalties likely to be received from the lessee for early termination)

2. Unguaranteed Residual Value

Lessor - Finance Lease accounting

Remember this is when the lessor keeps the risks and rewards of the asset

Accounting rules

• Keep the Asset on the SFP as normal

• Show lease receipts on the income statement (straight line basis)