Please 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 (see p375 of CIMA Learning System).

The amount of 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 like a loan from the lessor, cutting out the middleman. A company may be required to pay the lease amount, either in advance or in arrears, depending on the contract with the lessor. If the payments are made in advance, then the current liability is equal to the lease instalments in the current financial year and the rest 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.

Send in your own queries to questions@fm-magazine.com. We will ask a specialist or tutor to provide a response.

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