Under what condition does a lessee depreciate the leased asset in a finance lease?

In a finance lease, the lessee depreciates the leased asset over the asset's useful life if ownership of the asset transfers to the lessee at the end of the lease term. This is aligned with the concept of depreciation, which reflects the allocation of the asset's cost over its expected useful life. When ownership is transferred, the lessee effectively treats the leased asset as their own, thereby using the full useful life for depreciation.

The rationale behind this treatment is that if ownership is transferred, the lessee will continue to use the asset beyond the lease term just as they would if they had purchased it outright. Thus, matching the depreciation with the asset's total useful life accurately reflects the economic reality of ownership.

If ownership does not transfer, the lessee would typically depress the asset over the shorter of the lease term or the asset's useful life to ensure that the cost of the asset is matched with the revenue it generates during the period it is in use. This distinction ensures that the accounting reflects the true nature of the lease agreement and the rights and obligations of the lessee. This understanding is critical for proper financial reporting and compliance with accounting standards.