Finance Lease (Lessor)
Category
IFRS 16
A finance lease from the lessor's perspective is a lease that transfers substantially all the risks and rewards of ownership of the underlying asset to the lessee. Under IFRS 16 and ASC 842, the lessor derecognizes the asset and recognizes a net investment in the lease (lease receivable plus unguaranteed residual value).
Why it matters
Lessor finance lease accounting fundamentally changes the balance sheet: the underlying asset disappears and is replaced by a financial receivable. Revenue recognition shifts from rental income to interest income over the lease term. The classification criteria (transfer of ownership, bargain purchase option, lease term as major part of economic life, present value as substantially all of fair value) require significant judgment and directly impact the lessor's reported assets, revenue mix, and financial ratios.
How Arvexi handles this
Arvexi supports lessor accounting for both finance and operating leases. For finance leases, the platform calculates the net investment in the lease, generates the receivable amortization schedule, and produces the interest income journal entries each period. Classification is guided by the five-test framework with documented rationale for audit support.