## Indicators of Finance Lease
A lease is a Finance Lease if ANY ONE of the following five conditions is met:
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### Indicator 1 — Transfer of Ownership
The lease transfers ownership of the asset to the lessee by the end of the lease term.
> The lessor will give up legal title at the end → lessee gets ownership → Finance Lease.
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### Indicator 2 — Bargain Purchase Option
The lessee has an option to purchase the asset at a price significantly below Fair Value, and it is reasonably certain the option will be exercised.
> Key test: Is the purchase price a 'bargain' compared to expected FV at that date? If yes + reasonably certain → Finance Lease.
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### Indicator 3 — Major Part of Economic Life
The lease term covers the major part of the economic (useful) life of the asset (typically interpreted as ≥ 75% or a 'substantial portion').
$$\text{Coverage} = \frac{\text{Lease Term}}{\text{Total Economic Life}} \times 100\%$$
> Even without title transfer, if the lessee uses the asset for most of its life, it is economically equivalent to ownership.
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### Indicator 4 — Present Value Test
At the inception of the lease, the Present Value (PV) of MLP amounts to substantially all (≥ 90%) of the Fair Value of the leased asset.
$$\frac{\text{PV of MLP}}{\text{Fair Value of Asset}} \geq 90\%$$
> If the lessee is paying almost the full value of the asset through installments, they are economically purchasing it.
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### Indicator 5 — Specialized Nature
The leased asset is of such a specialized nature that only the lessee can use it without major modification.
> If no one else can realistically use the asset, the lessor has effectively sold it.
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### Memory Aid — TOPS + Specialized
Transfer of ownership | Option to purchase (bargain) | Part of economic life (major) | Substantially all FV (PV of MLP) | Specialized nature