Tag (SQ): Finance Lease

Based on the information provided, this lease arrangement falls under the category of a finance lease according to IPSAS 13/43: Leases.
To classify a lease as a finance lease, the following criteria are typically considered:

• Transfer of ownership: If the lease transfers ownership of the asset to the lessee by the end of the lease term.
• Bargain purchase option: If the lessee has the option to purchase the asset at a price lower than the asset’s fair value.
• Lease term: If the lease term is for a major part of the economic life of the asset.
• Present value of lease payments: If the present value of lease payments amounts to substantially all of the asset’s fair value.
• Specialized nature: If the asset is so specialized that only the lessee can use it without major modifications.

            In this case, Keta District Hospital:

• The lease term (4 years of primary lease period with an indefinite secondary lease period at peppercorn rent) covers a substantial portion of the asset’s useful life (10 years).
• The present value of the lease payments is likely to cover a substantial part of the fair value of the asset.
• The Assembly retains almost all risks and rewards of ownership (e.g., paying repair, maintenance, and insurance costs).

    Therefore, the lease qualifies as a finance lease, meaning the equipment will be recorded as an asset with a corresponding     liability for future lease payments.                                                                                                                                                                                                                                                                                                                                                                                                                             (B)

Prepare the extracts of the final accounts with regards to the lease of the equipment in accordance with IPSAS 43: Leases for the year ended 31st December 2024.
There are four steps in answering this question and these are:

• Calculate the lease liability and right-of-use asset
• Calculate depreciation on the right-of-use asset
• Determine the lease liability and interest expense for 2024
• Extract the financial statements

Calculation of lease liability and right-of-use asset
Since the lease is a finance lease, Keta District Hospital will recognize both a right-of-use asset and a lease liability at the inception of the lease. The lease liability is initially measured as the present value of the lease payments over the primary period, discounted using the interest rate implicit in the lease (15%). The present value of the lease payment is as follows: