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Appendix C: Key terms

Term Definition

Finance lease For lessees, a lease is a finance lease if the lessee
effectively obtains control of the underlying asset, by
meeting any of the following five criteria:

The lease transfers ownership of the underlying asset
to the lessee by the end of the lease term

The lease grants the lessee an option to purchase the
underlying asset that the lessee is reasonably certain
to exercise
The lease term is for a major part (generally 75%) of
the remaining economic life of the underlying asset
The sum of the lease payments and the present value
of any residual value guaranteed by the lessee
amounts to or exceeds substantially all (generally
90%) of the fair value of the underlying asset

The underlying asset is of such a specialized nature
that it is expected to have no alternative use to the
lessor at the end of the lease term

Identified asset An asset that could be the subject of a lease. An
identified asset may be either explicitly or implicitly
identified. An asset would not be an identified asset if
the supplier has the right and practical ability to
substitute the asset and could economically benefit
from exercising that right

Implicit rate (rate implicit The rate of interest that, at a given date, causes the
in the lease) aggregate present value of (a) the lease payments and
(b) the amount that a lessor expects to derive from
the underlying asset following the end of the lease
term to equal the sum of (1) the fair value of the
underlying asset minus any related investment tax
credit retained and expected to be realized by the
lessor and (2) any initial direct costs of the lessor

Incremental borrowing The rate of interest that a lessee would have to pay to
rate borrow on a collateralized basis over a similar term
an amount equal to the lease payments in a similar
economic environment

Initial direct costs Incremental costs of a lease that would not have been
incurred if the lease had not been obtained

Lease A contract, or part of a contract, that conveys the
right to control the use of property, plant, or
equipment (underlying asset) for a period of time in
exchange for consideration

Lease commencement date See Commencement date of the lease

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