Finance Lease Liabilities
Code: 2220Account Information
| Financial Statement | Statement of Financial Position |
| Normal Balance | Credit |
Definition
Finance lease obligations recognized under international accounting standards
Sub-accounts
📐 IFRS vs US GAAP Accounting Treatment
IFRS single model for all leases; GAAP distinguishes finance from operating leases in P&L
❓ Frequently Asked Questions
A: Finance leases are long-term lease contracts that effectively transfer all risks and rewards of asset ownership from the lessor to the lessee. A Right-of-Use Asset and a Lease Liability are recognized on the balance sheet under IFRS 16.
A: The finance lease liability is measured at the present value of future lease payments (principal) using the interest rate implicit in the lease or the lessee's incremental borrowing rate. Interest (financing cost) is added periodically.
A: The Right-of-Use Asset is depreciated over the useful life of the asset or the lease term, whichever is shorter, using the straight-line method. Depreciation is recorded with the entry: Dr. Depreciation Expense - ROU Asset, Cr. Accumulated Depreciation - ROU Asset.
A: Under IFRS 16, the accounting distinction for lessees between finance and operating leases has been eliminated. All leases (except short-term and low-value) are recognized on the balance sheet as a Right-of-Use Asset and a Lease Liability. The difference appears only in the income statement presentation.
A: A finance lease installment is recorded with the entry: Dr. Lease Liability (principal portion), Dr. Interest Expense (accrued interest), Cr. Bank Account (total installment paid).