The amount to be recorded as the cost of an asset under a finance lease is equal to the present value of the lease payments or the fair value of the asset, whichever is lower. carrying value of the asset on the lessor's books. present value of the lease payments plus the present value of any unguaranteed residual value. present value of the lease payments.

whichever is lower

Explanation:

Any assets cost is recorded at present value or fair value, whichever is lesser. This is analogous to stock being valued at cost price or sale price, whichever is less.

The reason behind is Prudence or Conservatism principle of accounting. The principle states that anticipated losses should be accounted for, but the anticipated gains should not be accounted for.

So, the asset value is recorded at the least value of the alternative valuations.

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