IAS 17 distinguishes between finance leases and operating leases and prescribes the accounting treatment for each type of lease. 

(a) Define terms ‘finance lease’ and ‘operating lease’. 

(b) List the main situations in which a lease would normally be classified as a finance lease. 

(c) Jon and Shabila Ltd is the lessee of the following leases:

Determine whether each of these leases is an operating lease or a financial lease.

Transcribed Image Text:

(i) Item A is leased at a cost EUR 10,000 per annum with a minimum lease term of five years. The item has a useful life of five years and would cost EUR 36,000 if bought for cash. (ii) Item B is leased at a cost of EUR 1,000 per month. The leased item has a useful life of 10 years and would cost EUR 80,000 to buy outright. The lease may be terminated at any time.