How is the asset calculated under Local GAAP?
Under financial leasing in accordance with Local GAAP, there are defined starting points for how the asset is to be calculated. The value is determined based on the asset’s price, the minimum lease payments, and the residual value. In this article, we explain how the calculation is carried out in practice.
The structure of a financial lease agreement
In a financial lease, the cost of the asset is clearly established from the outset, as the price is fixed. The asset is financed over a specified term at an agreed interest rate, and a residual value remains at the end of the lease period. At that point, the lessee is required to designate a buyer for the asset, and in practice, it is often the lessee who purchases it. A common example is vehicle leasing, where the car is frequently traded in as part of the next transaction.
Calculation of the asset’s value under Local GAAP
Since so much is known from the outset, there are also clear parameters for how the asset should be calculated. The fundamental principle is that the measurement should always be based on the lower of the following two alternatives:
The known price, that is, the asset’s fair market value.
The total of all minimum lease payments (the mandatory payments under the agreement) plus the residual value, discounted to present value to determine the amount.
In practice, this means that the lease payments and the residual value are discounted to present value and compared with the asset’s price. In most cases, the purchase price of the asset represents the lower amount. That amount is then used as the initial acquisition value and is recognized, from the commencement date of the lease, as both an asset and a corresponding liability.