CMA Intermediate · Financial Accounting · Lease Accounting
According to AS 19 Leases, a lease is classified as a finance lease when it
A lease is a finance lease when it transfers substantially all the risks and rewards incident to ownership of the asset. The test is the substance of the transfer; it does not require legal title to pass, a particular term length or any specific payment pattern.
- Atransfers substantially all the risks and rewards incident to ownership of the assetCorrect
- Balways passes legal title of the asset to the lessee at the end of the lease
- Chas a lease term of more than one year
- Drequires the lessee to pay the lease rentals in instalments
Explanation
AS 19 defines a finance lease as one that transfers substantially all the risks and rewards incident to ownership. Classification depends on this substance, not on legal title passing, the length of the term or the payment pattern. Hence the other options are not the defining test.
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