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Answers to supplementary objective test questions

CHAPTER 6 – LEASES

6.1 C

As per IAS 17 Leases, a finance leases arises when the risks and rewards are
transferred to the lessee.

Any lease that is not a finance lease is an operating lease.

Indicators that risk and rewards have transferred include:

 lease terms are the majority of the useful economic lifetime

 present values of minimum lease payments are significantly all of the fair
value of the asset

 ownership transfers to the lessee at the end of the lease term

 the lessee has the ability to continue the lease for a secondary period at
rentals substantially lower than market value.

Therefore, the lease of land is not a finance lease as the lease term is not the
majority of the economic lifetime of the asset (land has an indefinite lifetime)
and ownership has not been transferred at the end of the lease. The risks and
rewards do not transfer to JS. The land is leased under an operating lease.

The lease of the machine is a finance lease as the lease term is the majority of
the economic lifetime of the asset.

The lease of the building is a finance lease as the PV of the minimum lease
payments = significantly all of the FV of the asset.

The lease of the vehicle has a secondary rental period at significantly reduced
rentals. It is likely that this rental period will be utilised so the rental period will
be the majority of the useful economic lifetime of the asset. Therefore, the lease
is a finance lease.

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