IAS17 Leases distinguishes between finance leases and operating leases and prescribes the accounting treatment for each type of lease.
Conston Ltd (which applies IAS17) is the lessee of the following leases:
(a) Item A is leased at a cost of £5,000 per annum with a minimum lease term of five years. The item has a useful life of five years and would cost £18,000 if bought for cash.
(b) Item B is leased at a cost of £500 per month. The leased item has a useful life of ten years and would cost £40,000 to buy outright. The lease may be terminated at any time.
Determine whether each of these leases is an operating lease or a finance lease.
