If a lease agreement meets one or more of the indicators given below, the lease agreement should be accounted for as a finance lease:
Transfer ownership of the asset to the lessee when the lease term ends
Provide an option to purchase [bargain-purchase option] the asset at a price expected to be sufficiently lower than the fair value of the asset, at the date the option becomes exercisable
State the lease term is for the major part of the economic life of the asset even if the title is not transferred
At inception, reflect that the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset
Identify the leased assets of such a specialised nature that only the lessee can use them without major modifications
State the lessor's losses associated with the cancellation are borne by the lessee if the lessee can cancel the lease
Identify that gains/losses from the fluctuation in residual value accrue to the lessee
Allow the lessee to continue the lease for a secondary period at a rent that is substantially lower than market rent
If a lease agreement meets one or more of the above indicators, the lease agreement should be accounted for as a finance lease in terms of section 20 of IFRS for SMEs.
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