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Operating and Capital Leases - The CEO of Smith & Sons, Inc., was considering a lease...

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Accounting

Operating and Capital Leases - The CEO of Smith& Sons, Inc., was considering a lease for a new administrativeheadquarters building. The building was old, but was very welllocated near the company’s principal customers. The leasing agentestimated that the building’s remaining useful life was ten years,and at the end of its useful life, the building would probably beworth $100,000. The proposed lease term was eight years, and as aninducement to Smith & Sons’ CEO to sign the lease, the leasingagent indicated a willingness to include a statement in the leaseagreement that would allow Smith & Sons to buy the building atthe end of the least for only $75,000. As the CEO consideredwhether or not to sign the lease, she wondered whether the leasecould be accounted for as an off-balance-sheet operating lease.What would you advise her?

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3.9 Ratings (445 Votes)
As per IFRS 16 Asset shall be classified as a financing lease if the lease transfers ownership of the asset to the lessee by the end of the lease term the lessee has the option to purchase the asset    See Answer
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