How to capitalise ex-rental assets

Question

We have rented this truck for 2 years, now we are planning to  purchase the truck. In the original lease agreement, it didnt allow us to purchase. In order for us to enter the purchase agreement, we have to pay a break to compensate the vendor. I have below questions
1. Is this Finance lease?
2. How to quanlify the useful life of the truck, since it was used for a couple years already, should less these years?
3. The fee pay for break the lease agreement, can that be capitalised?
4. What value should be capitalised? Market value or contract value?

Thanks in advance!

Answer 1

Hi,

1 - type of lease depends on many things like, if it was specifically designed vehicle, or lease term covers the major life of the asset even if the title isnt transferred, refer the link below and look for "classification of leases"  *****://***.iasplus.***/en/standards/ias/ias17.

in this scenario, u just mention the time used for 2 years, contractual number of years can further help identifying the type of lease.

For example if the useful life of asset is 10 years and contractual was 5 years, so its would be operating lease

2- Again depends on number of years, as per example given above even though 5 years were expected, after purchasing if management assumes that we can use this for further 7 years may be, it can be depreciated in next 7 years then.

3 - the fees paid can be capitalized in case if it was amount paid to settle the obligation and then no more amount is paid to obtain the ownership, if u mean the fees as penalty, which would be nominal charges, then that would be expensed out.

4 - INITIAL RECOGNITION would be the amount paid to transfer the ownership and bring the asset in use (excluding the penalty charges) would be capitalized, and depreciate as per company policy with regards to useful life as explained in point 2.