The present value is arrived at after discounting the lease payments based on the interest rate that is associated with the lease payments. Similarly, in the lessee books of accounting the periodic lease payments should be apportioned between the reduction of the current liability and the finance charges. This is done so as to reduce the amount of interest that is paid by the lessee on the regular lease payments. Another significant aspects that lessee should consider is the depreciation of the assets leased. According to IAS-17, the depreciation of property held under lease should be similar to those assets that are owned. However, if it is uncertain that the lessee will own the property, the life of the property or the lease term whichever is lower is considered during the depreciation (Carpenter et al, 1994).
One of the key aspects that characterize a lease is that the lessee purchases an asset from a lessor. However, instead of paying cash, it is deemed that the purchase is financed with a loan that is given by the lessor. In this regard, the lessees are supposed to include the loan interest on the lease payments thus decreasing the lease liability. This is computed as follows. ...Show more