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Depreciation of Finance Lease Assets

Depreciation of Finance Lease Assets

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FRS102 states:

If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.

One of my clients typically enters finance lease agreements whereby:

  1. The initial period is between 36 to 60 months
  2. There is a secondary rental period
  3. My client is prevented from buying the assets at the end of the period but can sell the asset to a 3rd party and receive 97.5% of the sale proceeds.

I have in the past depreciated these assets over the initial period (taking this as the lease term). However I have recently wondered: as the lease term could effectively be anything as the secondary rentals could go on indefinately, should I depreciate the assets over the useful life instead?

 

 

 

 

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12th Jun 2019 13:46

What does the client actually do at the end of the primary term?

If they usually keep the assets, depreciate over useful life; if they usually end the lease, stick to using the primary term.

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By thacca
13th Jun 2019 07:53

Thank you Paul for your input.

I've found that lease term is defined in Appendix 1 of FRS102:

The non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.

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