Financial Accounting and Reporting-CPA Practice Exam

What is one criterion that the lessor must meet for a finance lease under IFRS?

1. The lessee does not have ownership of the property

2. The lessor can recognize profit/loss

3. The terms of the lease must exceed 12 months

4. The lessor bears all risks of asset ownership

The correct answer is: The lessor can recognize profit/loss

In the context of finance leases under IFRS, one of the essential criteria is that the lessor should be able to recognize profit or loss from the lease agreement. This understanding stems from the nature of finance leases, where the lessor essentially finances the acquisition of the asset for the lessee. The lessor, being the owner of the asset, can determine the financial implications of leasing that asset, which can include recognizing income over the lease term. When the lease is classified as a finance lease, it allows the lessor to recognize the leased asset on its balance sheet and treat the lease payments as income. This recognition ensures that the lessor's income statement reflects the revenues earned from leasing activities appropriately, which is critical for financial reporting and analysis. Essentially, this recognition of profit or loss aligns with the principle that the lessor has effectively transferred the risks and rewards of ownership related to the lease. This criterion highlights the fundamental nature of finance leases, where the lease structure impacts how both lessors and lessees account for the transaction, fostering transparency and comparability in financial statements. The distinct nature of finance leases under IFRS is what sets them apart from operating leases, where the lessor retains the risks and rewards associated with asset ownership and does