The classification of leases adopted in this standard is based on the extent to which risks and rewards

The classification of leases adopted in this standard is based on the extent to which risks and rewards associated with the ownership of a leased asset are transferred from the lessors to the lessees.

Set-up-company-in-vietnam-Vinasc1Risks include the possibilities of losses from idle production capacity or technological backwardness and of unfavorable changes in the economic situation, thus affecting the capital recoverability.

Rewards are profits expected to be earned from the operation of the leased assets over their economic life and incomes expected to be gained from the increased value of the assets or the value recoverable from the assets’ liquidation.

07. Leases will be classified as financial leases if the contents of the lease contracts include the transfer of most of risks and rewards associated with the assets’ ownership. Leases will be classified as operating leases if the contents of the lease contracts do not include the transfer of most of risks and rewards associated with the assets’ ownership.

08. The lessors and lessees must determine the leases as financial or operating leases right at the inception of the asset lease.

09. The classification of leases as financial or operating leases must be based on the nature of the provisions of the contracts. Below are the examples of cases that normally lead to financial leases:

a/ The lessor transfers the asset’s ownership to the lessee at the end of the lease term;

b/ At the inception of the lease, the lessee has the right to purchase the leased asset at a price expected to be lower than the reasonable price at the end of the lease term;

c/ The lease term accounts for most of the economic life of the asset even if the ownership is not transferred;

d/ At the inception of the lease, the present value of the minimum lease payment accounts for most of the reasonable value of the leased asset;

Set-up-company-in-vietnam-Vinasc2e/ The leased asset is of a special-use type which can be used only by the lessee without major modification or overhaul.

10. Lease contracts will be also considered financial lease contracts if they fall into at least one of the following three cases:

a/ If the lessee cancels the contract and pays compensation for damage associated with the contract cancellation to the lessor;

b/ Incomes or losses from the change in the reasonable value of the residual value of the leased asset are associated with the lessee;

c/ The lessee is able to continue leasing the asset after the lease contract expires at a rent lower than market rents.

11. Lease classification shall be made at the inception of the lease. If at any time the lessee and the lessor agree to change the provisions of the contract (but not on the renewal of the contract), which leads to a different classification of the lease under the criteria in paragraphs 06 thru 10 at the inception of the lease, the revised provisions shall apply to the entire lease term. Changes in estimates (for example, changes in estimates of the economic life or of the residual value of the leased asset) or changes in the lessees’ payment capability, however, shall not result in a new classification of the lease.

12. Lease of assets being the right to use land and houses will be classified as operating or financial lease. Nevertheless, as land normally has an indefinite economic life and the ownership is not transferred to the lessees at the end of the lease term and the lessees do not accept most of risks and rewards associated with the land ownership, the lease of assets being the land use right will be usually classified as operating lease. The rents paid for assets being the land use right shall be amortized over the entire lease term.