Lease Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’. As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine a lease is a capital lease or an operating lease: 1. Transfer of title: The asset is transferred to lessee at the end of the lease period concerned. 2. Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value. 3. Economic life: The economic life of the lease period is 75% or more than the useful life of the asset. 4. Value recovery: Present value of lease payments is greater or equal to 90% of the fair value. If a particular lease fulfils any one of the above four criteria, then it is considered as Capital lease . If a lease does not fulfil any of the above four criteria, it would be considered as operating lease . To determine: the type of lease.

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Chapter 15, Problem 1CPA

To determine

Lease

Lease is a contractual agreement whereby the right to use an asset for a particular period of time is provided by the owner of the asset to the user of the asset. The owner, who possesses the asset, is termed as ‘Lessor’ and user, to whom the right is transferred to, is termed as ‘Lessee’.

As per the notes issued by Financial Accounting Standard Board (FASB), the following are four criteria to determine a lease is a capital lease or an operating lease:

1. Transfer of title: The asset is transferred to lessee at the end of the lease period concerned.

2. Purchase option: The purchase option is exercisable when the purchase price is sufficiently lower than expected fair value.

3. Economic life: The economic life of the lease period is 75% or more than the useful life of the asset.

4. Value recovery: Present value of lease payments is greater or equal to 90% of the fair value.

If a particular lease fulfils any one of the above four criteria, then it is considered as Capital lease.

If a lease does not fulfil any of the above four criteria, it would be considered as operating lease.

To determine: the type of lease.

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