CS Executive · Corporate Accounting and Financial Management · Accounting Standards
Under AS 19 Leases, Kaveri Ltd leases machinery to Delta Ltd. Which feature would most clearly indicate that the lease is a finance lease from the lessor's viewpoint?
A lease is a finance lease when it transfers substantially all the risks and rewards incidental to ownership of the asset. Cancellable, short-term or usage-based leases point towards operating leases because the risks and rewards of ownership stay with the lessor.
- AThe lease can be cancelled by the lessee at any time without penalty and the asset reverts to the lessor
- BThe lease transfers substantially all the risks and rewards incidental to ownership of the assetCorrect
- CThe lease term is for a very short period compared with the asset's life
- DRentals are payable based on actual usage of the machinery only
Explanation
AS 19 classifies a lease as a finance lease if it transfers substantially all the risks and rewards incidental to ownership; otherwise it is an operating lease. The other options describe features of operating leases.
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