Operating and Finance Leases

question 151

Essay

Operating and finance leases
Berkeley Corporation wants to expand operations and is considering various leasing arrangements for additional equipment. Berkeley's management has heard the terms finance lease and operating lease mentioned by the accounting department and wants clarification of these terms before signing any lease contracts.
(a) Briefly explain the difference between a finance lease and an operating lease from a lessee's (Berkeley's) point of view. Your answer should include the financial statement impact of each type of lease.
(b) How does a lessee determine whether a specific lease contract is an operating lease or a finance lease? Include at least three of the indicators or situations of a finance lease specified by IAS 17 in your answer.
(c) Which of the above two types of leases is sometimes referred to as "off-balance-sheet financing?" Briefly explain.

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Definitions:

Code Of Ethics

A set of principles and guidelines designed to help professionals conduct business honestly and with integrity.

Crashing

A project management technique used to reduce the time for task completion by increasing the allocation of resources, often leading to higher costs.

CPM Network

A project management tool that uses critical path method (CPM) principles to model the activities and events of a project in a graphical network.

Critical Path

A sequence of critical tasks in a project timeline that need timely completion to ensure the project ends on its scheduled date.