Operating lease or as finance lease

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Reference no: EM13748093

Company A entered into a five-year lease on January 1, Year 1 with Company B for customized planes. Company B will provide a customized plane for Company A with specialized design. The following are the terms of the lease agreement: Fair value of the plane at the inception of the lease is $1,000,000. There is an twelve-year economic life Estimated (unguaranteed) residual value is $250,000. Company A does not absorb any gains or losses in the fluctuations of the fair value of the residual value. Annual lease payments of $200,000 are due on January 1 of each year. The implicit interest rate in the lease is 6 percent. There is an option to purchase at end of the lease-term for $400,000. The lease is non-cancelable and may not be extended. Required Discuss whether Company A should classify this lease as an operating lease or as finance lease under (a) IFRS and (b) US GAAP. Justify and explain your position.

Reference no: EM13748093

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