A finance lease is a long-term lease which meets one or more of the following criteria. Which of the following is NOT a criterion for classifying a lease as a finance lease under IFRS?

• A. The present value of lease payments amounts to substantially all of the fair value of the leased asset.
• B. The lease allows the lessee to terminate the lease at any time without penalty.
• C. The lease transfers ownership of the asset to the lessee by the end of the lease term.
• D. The lease term covers the major part of the asset's economic life.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of a finance lease under IFRS. A finance lease is a lease that transfers substantially all the risks and rewards of ownership of an asset to the lessee. It is treated as if the lessee owns the asset for accounting purposes.
2. Step 2: Review the criteria for classifying a lease as a finance lease under IFRS. These criteria include: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term, (b) the lease term covers the major part of the asset's economic life, and (c) the present value of lease payments amounts to substantially all of the fair value of the leased asset.
3. Step 3: Analyze the options provided in the problem. The first three options align with the criteria for a finance lease under IFRS, as they involve ownership transfer, lease term covering the asset's economic life, and lease payments approximating the asset's fair value.
4. Step 4: Identify the option that does NOT meet the criteria for a finance lease. The option stating 'The lease allows the lessee to terminate the lease at any time without penalty' does not align with the definition of a finance lease under IFRS, as it does not indicate a transfer of risks and rewards of ownership.
5. Step 5: Conclude that the correct answer is the option that does not meet the criteria for a finance lease under IFRS, which is 'The lease allows the lessee to terminate the lease at any time without penalty.'