According to IFRS what's the conditions to record a lease as Capital lease?

A lease falls into this category if any of the following requirements are met: 1. The life of the lease is 75% or greater of the assets useful life.2. The lease contains a purchase agreement for less than market value. 3. The lessee gains ownership at the end of the lease period. 4. The present value of lease payments is greater than 90% of the asset's market value.

finance lease is the lessor transfer substantially all risks and wards to the lessee we should consider transction substance instead legal form there are indicators or conditions refer to finance lease in inception term

-the lessee will obtain ownership by the end lease term

-the lessee has optain to purchase leased asset by the end lease term at lower fair value of asset leased

-the lessee obtains the major part form uesful life asset

-the minmum lease payment equal at least fair value of asset leased

   - the asset speicialaised has specialised nature

-the lessee can cancel the term lease and bears the loss associated the lessor

-gains and loss form fluctation residual interest accural to the leesse

-the lessee has ability to continue secandary period at lower market rent

the lessee shall recogines right and obligation in its fiancial statement as assets and liabilities at the amount fair value or lower the present value of minmum lease payments any directly cost recognise as asset and in subsequantly using effect interest metod and amortisation the charge financ and reduction the outstanding liability

To record a lease as a capital lease there are four conditions to be met:

1- Lease period is 75% or greater than the asset economic life

2- The lease contains ownership transfer to the lessee at the end of the lease.

3- The lease contains pargin purchase option to the lessee

4- The lease payments present value is greater than 90% of the lease market value of the leased asset

A capital lease is a lease in which the lessor only finances the leased asset, and all other rights of ownership transfer to the lessee. This results in the recordation of the asset as the lessee's property in its general ledger, as a fixed asset. The lessee can only record the interest portion of a capital lease payment as expense, as opposed to the amount of the entire lease payment in the case of the more common operating lease.

The criteria for a capital lease can be any one of the following four alternatives:

• Ownership. The ownership of the asset is shifted from the lessor to the lessee by the end of the lease period; or
• Bargain purchase option. The lessee can buy the asset from the lessor at the end of the lease term for a below-market price; or
• Lease term. The period of the lease encompasses at least 75% of the useful life of the asset (and the lease is noncancellable during that time); or
• Present value. The present value of the minimum lease payments required under the lease is at least 90% of the fair value of the asset at the inception of the lease.

If a lease agreement contains any one of the preceding four criteria, the lessee records it as a capital lease. Otherwise, the lease is recorded as an operating lease. The recordation of these two types of leases is as follows:

• Capital lease. The present value of all lease payments is considered to be the cost of the asset, which is recorded as a fixed asset, with an offsetting credit to a capital lease liability account. As each monthly lease payment is made to the lessor, the lessee records a combined reduction in the capital lease liability account and a charge to interest expense. The lessee also records a periodic depreciation charge to gradually reduce the carrying amount of the fixed asset in its accounting records.
• Operating lease. Record each lease payment as an expense. There is no other entry.

Given the precise definition of a capital lease, the parties to a lease are usually well aware of the status of their lease arrangement before a lease is signed, and typically write the lease agreement so that the arrangement will be clearly defined as either a capital lease or operating lease.

CONDITIONS TO RECORD CAPITAL LEASE;

• Ownership of the asset is transferred to the lessee at the end of the lease term;
• The lease contains a bargain purchase option to buy the equipment at less than fair market value;
• The lease term equals or exceeds 75% of the asset's estimated useful life;
• The present value of the lease payments equals or exceeds 90% of the total original cost of the equipment.

A lease is clas­si­fied as a finance lease if it transfers sub­stan­tially all the risks and rewards incident to ownership. All other leases are clas­si­fied as operating leases. Clas­si­fi­ca­tion is made at the inception of the lease. [IAS.4] Whether a lease is a finance lease or an operating lease depends on the substance of the trans­ac­tion rather than the form.

Sit­u­a­tions that would normally lead to a lease being clas­si­fied as a finance lease include the following:                     

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 at a price which is expected to be suf­fi­ciently lower than fair value at the date the option becomes ex­er­cis­able that                       at

the inception of the lease, it is rea­son­ably certain that the option will be exercised.

The lease term is for the major part of the economic life of the asset, even if title is not trans­ferred.                                                                 At    

the inception of the lease the

 present value of the minimum lease payments amounts to at least sub­stan­tially all of the fair value of the leased asset.

The lease assets are of a spe­cialised nature such that only the lessee can use them without major mod­i­fi­ca­tions being made. Other sit­u­a­tions that might also lead to clas­si­fi­ca­tion as a finance lease are: [IAS.] if The lessee is entitled to cancel the lease, the lessor's losses as­so­ci­ated with the can­cel­la­tion are borne by the lessee gains or losses from fluc­tu­a­tions in the fair value of the residual fall to the lessee (for example, by means of a rebate of lease payments) the lessee has the ability to continue to lease for a secondary period at a rent that is sub­stan­tially lower than market rent

A capital lease is a lease in which the lessor only finances the leased asset, and all other rights of ownership transfer to the lessee. This results in the recordation of the asset as the lessee's property in its general ledger, as a fixed asset. The lessee can only record the interest portion of a capital lease payment as expense, as opposed to the amount of the entire lease payment in the case of the more common operating lease.

In the over 100 countries that govern accounting using International Financial Reporting Standards, the controlling standard is IAS 17, "Leases". While similar in many respects to FAS 13 in the U.S., IAS 17 avoids the "bright line" tests (specifying an exact percentage as a limit) on the lease term and present value of the rents. Instead, IAS 17 has the following five tests. If any of these tests are met, the lease is considered a finance lease:

·         ownership of the asset is transferred to the lessee at the end of the lease term;

·         the lease contains a bargain purchase option to buy the equipment at less than fair market value;

·         the lease term is for the major part of the economic life of the asset even if title is not transferred;

·         at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.

·         the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made.

IAS 17 is currently undergoing a revision, as a joint project with the U.S. lease accounting standard. Current plans are for the revision to be finalized in late 2014, with implementation expected in 2017. For more details, see Accounting for leases in the United States. ownership of the asset is transferred to the lessee at the end of the lease term;

·         the lease contains a bargain purchase option to buy the equipment at less than fair market value;

·         the lease term is for the major part of the economic life of the asset even if title is not transferred;

·         at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.

·         the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made.

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A capital lease is s lease in which the lessee records the asset as if it owns the asset. This simply means that the lessor is treated as a party that happens to be financing an asset that the lessee owns. The lessor should record a lease as a capital lease if any of the following conditions are met.

1. The lease period covers at least 75% of the useful lift of the asset

2.There is an option to buy the leased asset following the lease expiration at a below market rate.

3.Owner ship of the leased asset shifts to the lessee following expiration

4. The present value of the minimum lease payments total at least 90% of the fair value of the asset at the beginning of the lease.

Because financial leasing is a financing tool that it is going through similar stages of the stages of the granting of credit by banks. And so on as shown in the following:

First phase of the query

Upon receipt of the leasing company requested a rental customers, the company asks the customer to provide it with some needed to assess the creditworthiness of the client and identifying information if the company is ready to offer its services to the client. This information includes the following:

1. Basic information about the desired leased assets

Required equipment and is intended to (replacement and renovation, or addition of production capacity), the estimated cost, the technical specifications of the equipment, the proposed client-side supply points, the client's desire to own the equipment at the end of the term of the lease.

2. Financial statements for the client

The financial statements for the client include the tenant for a period ranging from three to five years, and the operating plan for the company, the expected financial flows of the company after obtaining the required equipment hire.

3. Institutional information

Memorandum and Articles of Association of the company, the nature of the company's business activities and areas of expansion, partners and members of the Governing Council (qualifications - experience - ........), no significant changes have taken place recently in the shareholders and the members of the Board of Directors or in the company's activities or expansion plans .

4. Other information

Major clients of the company, the major suppliers, sources of raw materials and the availability of alternative sources, the company's relationships with banks, and the regularity in the company to meet its financial obligations, the auditors' names.

Second phase Credit Credit Appraisal Rating

The leasing credit assessment of the client company to review the information and financial data and non-financial, that was obtained from the customer or from any other sources, in order to determine the degree of credit risk and thus take the appropriate decision. The stage includes credit assessment of the verification of adequate means Leasing of conditions and requirements of the tenant, and the nature of the activity established and growth potential, and make sure the leased equipment supplier and its potential to provide after-sales service commitment.

Third, the bidding phase

The Leasing leasing company after the completion of gathering all the information, analysis and evaluation of the offer to the tenant, since this offer sets the basic conditions for this lease, including rental value periodic (fixed or variable), and the right of the tenant to purchase the leased asset at the end of the contract period, and fees and expenses borne by the tenant, additional guarantees required.

Fourth: the stage of negotiation

After the tenant customer studying the offer from the company and compare it to other offers received from other companies, the tenant enters the client and leasing company in the negotiations on the lease terms and conditions for the supply of the leased asset to reach an agreement on these conditions.

Fifth: the stage of the approval of the lease by the company

The decision to approve after reviewing information about the tenant activity and profitability of its operations, and to ensure the availability of the elements of the credit to the tenant, and its ability to pay its rental value on a regular basis, taking into account the fit value of the contract with the limits of lower credit ceilings and upper determined by the leasing company for each client from their clients.

Sixth: the stage of signing the contract

At this stage is the signing of the lease and the order of the leased asset from the supplier receiving procedures.

A capital lease is a lease in which the lessor only finances the leased asset, and all other rights of ownership transfer to the lessee. This results in the recordation of the asset as the lessee's property in its general ledger, as a fixed asset. The lessee can only record the interest portion of a capital lease payment as expense, as opposed to the amount of the entire lease payment in the case of the more common operating lease.

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