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Leases

3.3 Initial treatment of finance lease

At the inception of a lease, lessors present assets held under a finance lease as a
receivable. The value of the receivable should be equal to the net investment in the
lease.

The net investment is the present value of:

 Fixed payments

 Variable payments valued at the inception date

 Residual value guarantees

 Unguaranteed residual values

 Purchase options reasonable expected to be exercised

 Termination penalties, if the lease term reflects the expectation these will be
incurred.

3.4 Subsequent measurement of finance lease

The lease receivable is increased by interest income, which is also recorded in profit
or loss:

Dr Lease receivable X

Cr Investment income (P/L) X

Cash receipts reduce the lease receivable:

Dr Cash X

Cr Lease receivable X

Illustrations and further practice

Now try TYU 7 from Chapter 7.

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