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Funding a business
Lease classification in Business
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[QUOTE="Yakub02, post: 310743, member: 94426"] If it cannot be done with the entire lease, it must be classified as a finance lease unless it is clear that both elements are operating leases, in which case the entire lease is classified as an operating lease. If the land element is immaterial, the land and buildings may be treated as a single unit for the purpose of lease classification. In such a case, the economic life of the building is regarded as the economic life of the entire leased asset. The lessor does not record the leased asset in his own financial statements because he has transferred the risks and rewards of ownership of the leased asset to the lessee. Instead, he records the amount due to him under the terms of the finance lease as a receivable. The receivable is described as the net investment in the lease. Net investment in the lease is the gross investment in the lease discounted at the interest rate implicit in the lease. Gross investment in the lease is the aggregate of: (a) the lease payments receivable by the lessor under a finance lease, and (b) any unguaranteed residual value accruing to the lessor. the aggregate present value of the lease payments and the unguaranteed residual value; to be equal to; the sum of the fair value of the leased asset and any initial direct costs of the lessor. [/QUOTE]
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