Can you explain more about the finance lease and its appearance in statements?

A finance lease is capitalised at cost (the present value of future minimum lease payments) in the books of the lessee, and a liability recognised to the extent of this amount.

The capital due for settlement over the next 12 months is classified as a current liability and the balance as a non-current liability.

The lease is effectively a loan from the lessor, cutting out the middleman (the bank).

A company may be required to pay the lease amount either in advance, or in arrears.

If in advance, then the current liability is equal to the lease instalments in the current financial year, and the rest of the amount goes into non-current liabilities.

If the payments are made in arrears, then the current liability is the next period’s lease instalment, less the amount of interest cost in that instalment, and the non-current liability is the interest cost plus the remaining amount of the liability.

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