Lease accounting

[shakilbadar]

what should be the treatment of a finance lease if we have variable interest rate and receive variable installments.

regards,

[kamranACA]

Dear,

Variable installments must be due to variable interest rates. In fact such arrangments are financing arrangements or musharika arrangements. However, these are typically accounted for as finance lease by lessees. One should deeply study the finance contract that whether or not it constitute a finance lease arrangement or a simple loan financing.

If it is concluded to be a finance lease, then at each balance sheet date the repayment schedule may be required to be prepared afresh considering the interest rates applicable as of that date. Such revised repayment schedule would be discounted through IRR (implicit interest/yield rate) for apportioning the rentals into principal and interest. The book value of the asset would remain unchanged. However, the lease liability and finance charge may require certain changes on certain balance sheet dates.

I expect that the changes in rentals will only cause an adjusting affect to the interest figures and principal/liability amount may also remain unaffected. This could be checked only after revised calculations. So, it's only a guess.


Regards,


KAMRAN.