Quick Finance Tip - Finance or Operating Lease Under IFRS

​Classification depends on the risk and rewards incidental to ownership. If substantially “all” the risk and rewards are transferred to the lessee, the lease is a finance lease and the lessee reports the asset and obligation on the Balance Sheet. Otherwise, it is an operating lease and only reports an expense on the Income Statement.
 
Finance Lease for Lessee Prescriptions:

• Ownership transfer of the asset to the lessee by the end of the term
• Option to purchase the asset at a price that is expected to be lower than fair value (with reasonable certainty that option will be exercised)
• Term is the major part of the economic life of the asset
• Present value of the minimum lease payments substantially amounts to at least all the fair value of the asset
• Specialized nature of an asset that only the lessee can use without major modifications