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Lease classification
Other □ Title to the asset remains with Lessor Corp upon lease
expiration
□ Lessee Corp does not guarantee the residual value of the
equipment at the end of the lease term and Lessor Corp
does not obtain any third-party residual value insurance
□ Estimated fair value of the equipment at the end of the
lease term is $250
□ Lessee Corp pays for all maintenance of the equipment
separate from the lease
□ There are no initial direct costs incurred by Lessee Corp
□ Lessor Corp does not provide any incentives
How should Lessor Corp classify the lease?
Analysis
Lessor Corp should assess the lease classification using the criteria outlined in ASC 842-10-25-2 and
ASC 842-10-25-3.
Criteria Analysis
Transfer of ownership Ownership of the asset does not transfer to
Lessee Corp by the end of the lease term.
Purchase option which the lessee is reasonably The lease does not contain a purchase option.
certain to exercise
Lease term is for the major part of the remaining Lessee Corp is utilizing the asset for
economic life of the asset approximately 83% of the economic life of the
asset (5-year lease / 6-year economic life),
which is deemed to be a major part.
Sum of present value of lease payments and any The present value of the lease payments
residual value guarantee by the lessee amounts to (discounted at the rate Lessor Corp charges in
substantially all of the fair value of the underlying the lease of 7.04%) is $4,822.
asset
Therefore, the present value of the lease
payments amounts to approximately 96% of the
fair value of the leased asset ($4,822 / $5,000),
which is deemed to be substantially all of the
fair value of the leased asset.
Specialized nature The digital imaging equipment is non-
specialized and could be used by another party
without major modifications.
Lessor Corp should classify the lease as a sales-type lease because the lease term is for a major part of
the economic life of the equipment and the present value of the lease payments amounts to
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