Which of the following criteria would cause a lessee to classify a lease as a Finance Lease?

Answer options:

The lease term is 60% of the economic life of the asset

The present value of lease payments equals 95% of the fair value of the asset

The asset is specialized but has an alternative use to the lessor

The lease contains an option to purchase the asset that the lessee is not reasonably certain to exercise

How to approach this question

Recall 'OWNES' criteria: O - Ownership transfers. W - Written option to purchase (reasonably certain). N - Net present value (90% rule). E - Economic life (75% rule). S - Specialized asset (no alternative use). Any one met -> Finance Lease.

Full Answer

B.The present value of lease payments equals 95% of the fair value of the asset✓ Correct

A lease is a Finance Lease if the PV of lease payments amounts to substantially all (typically >90%) of the fair value of the underlying asset.

Common mistakes

Confusing the 75% life rule with the 90% FV rule.

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Practice the full CPA FAR Practice Exam 3

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