What a finance lease in essence is, is you buying an asset with a support of another party, that’s initially financing the purchase. Usually it’s done in the form that the financing party is purchasing the asset and is leasing it forward to you. This transaction is really common these days, however the disclosure on the statement of cash flows is something that can go messy. Hence with the following we hope to set out the basics.<\/p>\n
First off, on the balance sheet you recognize the asset and the liability. An asset is obviously the asset you just leased, but with this you also need to recognize the liability against the financing party, who initially bought the asset. So with debit you increase your assets and with credit the liabilities. Now when you think about it, did you actually pay anything at this stage? No, you didn’t.
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\nOkay, let’s continue to the income statement. On your income statement the initial purchase is not recognized obviously, but what is, is future depreciation of the asset. The assets bought under finance lease are always depreciated during the shorter of either the rental period or the useful life deemed to the asset. <\/p>\n
As for the statement of cash flows now, the initial acquisition of the asset in question is never disclosed purely because you actually didn’t pay anything for the asset. It’s not an outflow of cash initially and is recognized only in future periods when you start paying off the finance lease liability. <\/p>\n
If you would recognize the acquisition of the asset under investing activities and would show the total value of the asset on your balance sheet as an outflow on the statement of cash flows, you’d eventually end up showing twice the cash outflow. So keeping that in mind, make sure assets bought under finance lease are never shown under investing activities and also bear in mind that the initial acquisition is never a full outflow. Your cash outflows will always be your lease payments, regular and afar a certain period.<\/p>\n","protected":false},"excerpt":{"rendered":"
What a finance lease in essence is, is you buying an asset with a support of another party, that’s initially financing the purchase. Usually it’s done in the form that the financing party is purchasing the asset and is leasing it forward to you. This transaction is really common these days, however the disclosure on […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[28,50],"tags":[],"class_list":["post-2776","post","type-post","status-publish","format-standard","hentry","category-4-reporting","category-4-5-statement-of-cash-flows"],"aioseo_notices":[],"_links":{"self":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2776","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=2776"}],"version-history":[{"count":3,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2776\/revisions"}],"predecessor-version":[{"id":2780,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2776\/revisions\/2780"}],"wp:attachment":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=2776"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=2776"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=2776"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}