Under IAS 17, a finance lease is accounted for by the lessee as the acquisition of an asset with loan financing. The lessee recognizes the asset on the statement of financial position and depreciates it over its useful life. This depreciation is charged as an expense to the statement of profit or loss.

Simultaneously, a lease liability is recognized. Each lease payment is apportioned between a finance charge (interest) and a capital repayment. The finance charge is calculated to produce a constant periodic interest rate on the outstanding liability and is recognized as an expense in the statement of profit or loss. The capital repayment reduces the liability on the statement of financial position.

C. Lease payments paid represent a cash outflow, which is split between the finance cost (P&L) and capital repayment (Statement of Financial Position), not expensed in its entirety.

D. Lease payments payable is the outstanding liability and is presented on the statement of financial position, not as an expense in the statement of profit or loss.

E. The capital repayment element of the lease payments reduces the principal of the lease liability on the statement of financial position; it is not a P&L expense.

1. International Accounting Standards Board (IASB). (2003). International Accounting Standard 17: Leases. Paragraph 27. This paragraph explicitly states: "A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period."

2. Elliott

B.

& Elliott

J. (2019). Financial Accounting and Reporting (19th ed.). Pearson Education. In Chapter 19

'Leasing'

the section on lessee accounting for finance leases details that both depreciation and interest expense are charged to the income statement (statement of profit or loss).

3. Weygandt

J. J.

Kimmel

P. D.

& Kieso

D. E. (2019). Financial Accounting: IFRS (4th ed.). John Wiley & Sons. Chapter 15

'Long-Term Liabilities'

explains that for a finance lease

the lessee records depreciation expense on the leased asset and interest expense on the lease liability in the income statement.