Question

Define operating lease and finance lease?

when a leased property can be classified under investment property ?

Answer 1

IAS 17: Lease

in the lease transaction there is a contract between the lessor and the lessee for the hire of an asset. The lessor retains the legal ownership but conveys to the lessee the right to use the asset for an agreed period of time in return for specified rentals

lease can be classified as two types;

1. Finance lease and
2. Operating lease

Finance lease

Finance lease is a lease that transfer substantially all the risk and rewards incident to ownership of an asset. Tittle may or may not eventually be transferred.

As an add on to the definition you have to satisfies any of the below criteria for consider a lease as finance lease as per IAS;

• If there is a hire purchase option
• If the ownership transferred by the end of the lease term
• If the lease term for a major part of the asset’s useful life
• If the present value of minimum lease payments greater than or substantially equal to the assets fair value

For example, let's say John Doe owns a house on Main Street. He does not live in the house; he decides to lease it to Jane Smith. John continues to be the owner of the house, but Jane agrees to pay John $800 a month in return for letting her live there for a year. They type up a lease, which sets forth the exact dates Jane can live in the home, what improvements or changes Jane is allowed to make to the home, and what happens if Jane damages the home.

OPERATING LEASE

A lease other than a finance lease is an operating lease.

As an example, company X taken one Truck for lease for a 10 years lease from company Y. and the company X will pay an amount of $ 300 as monthly lease payment and after 10 years the company X will return the Truck to company Y.

when a leased property can be classified under investment property ?

If an investment property contains one portion held for either rental income or capital appreciation, and another portion held for other uses, and if the portions could be sold separately, then account for them separately. If it is not possible to do so, then account for the property as an investment only if the portion held for other uses is an insignificant amount of the total asset value.

If an entity provides services to the occupants of a property, it can account for the property as an investment property only if the services it provides are insignificant.

Property held by a lessee under an operating lease may be investment property if it otherwise meets the definition of investment property and the lessee recognizes it under the fair value model. If a lessee classifies such a property as an investment property, then it must account for all of its investment property using the fair value model.