Lease Fundamentals

lessee

a person who has possession of real or personal property under a lease

lessor

the owner of the asset that is being leased

capitalized as assets with a corresponding liability

All leases are _____________________________________.

1. transfer of ownership test 2. purchase option test 3. economic life test 4. present value of lease payments test 5. specialized nature test

Name the 5 lease classification criteria.

lessor transfers ownership to lessee at the end of the lease (think rent-to-own)

What is meant by the transfer of ownership test?

purchase option that allows lessee to purchase leased asset for less than the expected fair value at the end of a lease

What is meant by the purchase option test?

lessee has control over the asset for majority of its economy life (75% or greater)

What is meant by the economic life test?

if the present value + any residual value guarantee is substantially all of the fair value of the leased asset (90% or greater)

What is meant by the PV of lease payments test?

the leased asset is of such a specialized nature that it has no alternative use to the lessor at the end of the lease term, so the lessor is expected to price the lease to recover its investment, essentially selling the asset to the lessee

What is meant by the specialized nature test?

sales-type

For a lessor, if any of the 5 criteria are met, it is a(n) ___________ lease.

operating

For a lessor, if none of the 5 criteria are met and neither of the 2 additional criteria are met, then it is a(n) __________________ lease.

direct-financing

For a lessor, if none of the 5 criteria are met but BOTH of the additional criteria are met, then it is a(n) _________________ lease.

1. PV of the sum of lease payments + any residual value guaranteed by lessee & any other 3rd party) = > substantially all of the FV of the underlying asset 2. lessor will collect lease payments + any amount necessary to satisfy a residual value guarantee

What are the additional lease classification criteria for lessors?

finance

For lessees, if any of the 5 criteria are met, then it is a(n) ______________ lease.

operating

For lessees, if none of the 5 criteria are met then it is an _______________ lease.

1. must be an identified asset 2. the lessee must have control over the asset throughout the period of use

What are the 2 criteria to determine if a lease is present?