Reliable manufactures industrial machinery. On January 1, 2023, Reliable (lessor) agrees to lease machinery to Halifax Ships (lessee). Reliable uses ASPE and Halifax Ships uses IFRS. The following information relates to the lease agreement.

1. The lease term is five years, with no renewal option, and the machine has a useful life of six years.

2. The machinerys cost is $720,000.

3. At the end of the lease term the asset reverts to Reliable. The assets is expected to have a residual value of $110,000 at this time, and this value is guaranteed by Halifax Ships. Halifax Ships depreciates all equipment on a straight line basis.

4. The lease agreement requires equal annual payments, beginning on January 1, 2023.

5. Reliable assessed the credit of Halifax Ships and determined the company was a regular credit risk for meeting its obligations. Halifax Ships had been a good customer of Reliable for a long time. Based on this Reliable decided to enter into the lease agreement using the implicit rate of 6% in setting the lease payments. Halifax Ships is aware of this rate.

6. Reliable determined that there are no additional costs it might have to incur in connection with this lease during the lease term.

Required:

Part A

Discuss the nature of this lease from both the viewpoint of the lessor and the lessee. In other words, what type of lease is this and explain why. Halifax Ships follows IFRS and Reliable follows ASPE.

Halifax Shipslessee

Reliablelessor