ACCA Strategic Professional · Strategic Business Reporting (International) · Leases
Zeta Ltd leases a machine to a customer for 4 years of its 12-year useful life. Ownership does not transfer, there is no purchase option, and the present value of the lease payments is about 30% of the machine's fair value. The machine will have substantial residual value at lease end. Under IFRS 16, how should Zeta classify the lease?
The lease is an operating lease. The term covers only a third of the asset's life, the present value of payments is far below fair value, and there is no ownership transfer or purchase option, so substantially all risks and rewards of ownership remain with the lessor.
- AOperating lease, because substantially all risks and rewards of ownership are not transferredCorrect
- BFinance lease, because the lease term is longer than three years
- CFinance lease, because the lessor is a company and not an individual
- DOperating lease, because lessors must always treat leases of machinery as operating leases
Explanation
IFRS 16 classifies a lease as finance only if it transfers substantially all the risks and rewards incidental to ownership. Here the term is a third of the economic life, the present value is only 30% of fair value, and there is no transfer of title or purchase option. The lease is therefore an operating lease; the other options invent rules that do not exist in IFRS 16.
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