Finance lease- CFA website

A company that prepares its financial statements according to IFRS leased a piece of equipment on 1 January 2020. Information relevant to the transaction is as follows:

  • Five annual lease payments of $25,000, with the first payment due 1 January 2020
  • Interest rate on similar company debt is currently 8%
  • The fair value of the equipment is $115,000
  • Useful life of the equipment is seven years
  • The company depreciates other equipment in the same asset class on a straight-line basis

The total expense related to the lease on the company’s 2020 income statement will be closest to:

  1. $25,000.
  2. $28,185.
  3. $22,024.


B is correct. Under IFRS 16 all leases are classified as a finance lease and must be capitalized.

Using a financial calculator for an annuity due at the beginning of the period:

PV of lease payments: PMT = $25,000, i = 8%, N = 5, Mode = Begin, Compute PV.

PV = $107,803

Therefore, the lease would be capitalized at $107,803.

Present value of the lease (asset value capitalized and initial liability) $107,803
Payment 1 January 2020 –25,000
Liability value 1 January 2020 $82,803
Interest expense in 2020 0.08 × $82,803 $6,624.25
Amortization expense for the year using the lease term as the useful life (no indication that the lease will be renewed beyond the initial term) $107,803/5 $21,560.63
Total expense in 2020 $28,184.88

My concern: 25,000 pmt includes 8,624.24 for interest, so liability in 2010= 107,803-8,624.24=99,178.76

where was i wrong?

How do you figure that?

By 107,803*8% :slightly_smiling_face:

When is the first payment made?

First year

What’s the exact date?


So . . . how much time elapsed between the inception of the lease and the first payment?

Understood :grinning:. Thank you

My pleasure.

1 Like

I’m confused that the interest is 62% of expected payments. I must be missing something.

Extracted from a financial statement:

Approximate future minimum lease payments under capital and all other leases = $1,305M.

Imputed interest = $813M.

Could someone please enlighten me? Thank you.

If the payment is at the start of the year there is no interest to pay on that 25,000
Interest = cost of borrowing over time.

Use the calcualtor
Once numbers in and computed under TVM
Press "nd PV = Amort
Set P1 = 1 P2 =2 scroll down
You will see your year 1 entries