Essential condition that determine finance lease?

1. The lease term is for a major part of the economic life of the asset.
2. The present value of the minimum lease payments equals or exceeds substantially all of the fair value of the asset.
3. The asset is expected to be transferred to the lessee at the end of the lease term.
4. The lease agreement contains a purchase option at a bargain price.
5. The lease agreement allows the lessee to extend the lease term at a below-market rate.
6. The asset is of a specialized nature that only the lessee can use without major modifications.

Essential Conditions to Determine a Finance Lease:

1. Transfer of Ownership:
- The lessor transfers ownership of the asset to the lessee at the end of the lease term.

2. Transfer of Risks and Rewards:
- The lessee assumes all substantial risks and rewards of ownership during the lease term.
- This includes the risk of obsolescence, fluctuations in value, and repairs.

3. Term of Lease:
- The lease term is substantially equal to the useful life of the asset.
- This indicates that the lessee is acquiring most of the economic benefits of ownership.

4. Present Value of Minimum Lease Payments:
- The present value of the minimum lease payments is at least 90% of the fair value of the leased asset.
- This means that the lessee is obligated to pay the majority of the asset's value.

5. Economic Incentive for Lessee:
- There is an economic incentive for the lessee to acquire ownership of the asset at the end of the lease term.
- This could include a pre-agreed purchase price or residual value that is lower than the expected fair market value.

6. Leased Asset Used in Lessee's Business:
- The leased asset is used primarily by the lessee in its business operations.

7. Customizing:
- The asset is customized or modified to the lessee's specific requirements.

8. Lessor's Limited Involvement:
- The lessor does not have a significant role in the management or operation of the asset.