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There are rules to decide whether a lease counts as an asset for the company (in which case part of the rent is interest). IFRS states if any of these tests ar
by rjtavares 11y ago
There are rules to decide whether a lease counts as an asset for the company (in which case part of the rent is interest).
IFRS states if any of these tests are met, the lease is considered a finance lease:
-ownership of the asset is transferred to the lessee at the end of the lease term;
-the lease contains a bargain purchase option to buy the equipment at less than fair market value;
-the lease term is for the major part of the economic life of
the asset even if title is not transferred;
-at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.
-the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made.
US GAAP has a similar provision.
- rahimnathwani 11y agoThe accounting rules to classify leases as {financial; operating} exist to prevent companies from disguising financial leverage as operating leverage. They are intended to ensure that the balance sheet represents a true and fair view of the state of the company. They are not (primarily, at least) intended to ensure that companies are taxed appropriately.
- rjtavares 11y agoYes, but that's because it was irrelevant. The same rule (albeit more enforced) could be used for tax purposes in this case.
- rahimnathwani 11y agoThe tax implications are still, and will always be, irrelevant to accounting rules. The purpose of accounting rules (like IFRS, US GAAP etc.) is to ensure that companies' financial statements represent a true and fair view of the state of the company. This objective has nothing to do with tax.