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:
- The initial period is between 36 to 60 months
- There is a secondary rental period
- 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?