Question

Under the provisions of ASC 842 which of the following is not a criterion to use in determining whether a lessee should classify a lease as a finance lease

Answer 1

For a lease to be classified as a finance lease, it must meet one of the five finance lease criteria, listed below. If the lease does not fall under any of these criteria, it is classified as an operating lease.

Transference of title/ownership to the lessee

Transfer of ownership of the underlying asset to the lessee by the end of the lease term.

Purchase option

Lease arrangement grants the lessee an option to purchase the asset, that is reasonably certain to be exercised.

Lease term for major part of the remaining economic life of the asset

The lease term is for a major part of the remaining economic life of the underlying asset. (Note: The FASB provided some additional clarification that “major part” would be consistent with the 75% threshold used under ASC 840).

Present value represents “substantially all” of the fair value of the asset

The present value of the sum of the remaining lease payments equals or exceeds substantially all of the fair value of the underlying asset. If applicable, any residual value guarantee by the lessee that is not already included in lease payments would also be included in the present value calculation. (Note: The FASB provided some additional clarification that “substantially all” would be consistent with the 90% threshold used under ASC 840).

Asset specialization:

The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.