What is Financial Leasing?
Financial leasing is a contractual arrangement in which the lessor transfers to the lessee substantially all the risks and rewards incidental to ownership of an asset for an agreed period, in exchange for periodic payments, accounted for under IFRS 16 with a right-of-use asset and lease liability on the lessee’s balance sheet.
How It Works
- Initial recognition: lessee records right-of-use asset and lease liability equal to PV of lease payments.
- Lease liability accrues interest using the lessee’s incremental borrowing rate.
- Right-of-use asset depreciated over the shorter of lease term and useful life.
- Lessor may transfer ownership at the end for a nominal amount.
Saudi Context
Saudi financial leasing is regulated by SAMA under the Financial Leasing Law, with Saudi Fransi Capital, Alinma Tokio Marine, and dedicated leasing companies offering vehicle, equipment, and real estate leases. ZATCA-aligned IFRS 16 treatment ensures consistency between book and tax depreciation of right-of-use assets.
Example
A Saudi business leases a delivery truck for 5 years with monthly payments of SAR 6,000. PV at 8% = SAR 296,000. Entry: Dr Right-of-Use Asset 296,000, Cr Lease Liability 296,000. Monthly: depreciation SAR 4,933 + interest portion of payment.