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Definition of terms
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.
A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.
An operating lease is a lease other than a finance lease.
A non-cancellable lease is a lease that is cancellable only:
a. upon the occurrence of some remote contingency;
b. with the permission of the lessor;
if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or
d. upon payment by the lessee of such an additional amount that, at inception of the lease, continuation of the lease is reasonably certain.
The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provision of the lease. As at this date:
a. a lease is classified as either an operating or a finance lease; and
b. in the case of a finance lease, the amounts to be recognized at the commencement of the lease term are determined.
The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the date of initial recognition of the lease (i.e., the recognition of the assets, liabilities, income or expenses resulting from the lease, as appropriate.).
The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.
Minimum lease payments are the payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together with:
a. for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or
b. for a lessor, any residual value guaranteed to the lessor by:
i. .the lessee;
ii. a party related to the lessee; or
iii. a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.
However, if the lessee has an option to purchase the asset at a price that is expected to be sufficiently lower than fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised, the minimum lease payments comprise the minimum payments payable over the lease term to the expected date of exercise of this purchase option and the payment required to exercise it.