Which statement is NOT a characteristic of an operating lease under FASB 13?

Which statement is NOT a characteristic of an operating lease under FASB 13?

• A. Automatic title transfer
• B. Bargain purchase option exists
• C. Economic life greater than 75%
• D. PV of payments (no resid) greater than 90% of FMV

Answer: (D)

Under FASB 13, a lease is classified as a finance (capital) lease if any of the four criteria indicate that the lessee effectively gains ownership or substantial economic benefit from the asset. Those criteria are: transfer of ownership by the end of the term, a bargain purchase option, a lease term that covers a large portion of the asset’s economic life (typically 75% or more), and the present value of the minimum lease payments being at least 90% of the asset’s fair value. If none of these are met, the lease is classified as operating. The statement about the present value of lease payments being at least 90% of fair value is a classic indicator that the lease is financing the asset, not operating. It shows that the lessee is effectively paying for most of the asset’s value through the lease, which aligns with a finance lease. The other characteristics listed—ownership transferring by term, a bargain purchase option, and a lease term that’s a large share of the asset’s life—also signal a finance lease, but the key point is that a high PV-to-FMV ratio is the clearest, defining indicator that the lease is not operating.

Under FASB 13, a lease is classified as a finance (capital) lease if any of the four criteria indicate that the lessee effectively gains ownership or substantial economic benefit from the asset. Those criteria are: transfer of ownership by the end of the term, a bargain purchase option, a lease term that covers a large portion of the asset’s economic life (typically 75% or more), and the present value of the minimum lease payments being at least 90% of the asset’s fair value. If none of these are met, the lease is classified as operating.

The statement about the present value of lease payments being at least 90% of fair value is a classic indicator that the lease is financing the asset, not operating. It shows that the lessee is effectively paying for most of the asset’s value through the lease, which aligns with a finance lease.

The other characteristics listed—ownership transferring by term, a bargain purchase option, and a lease term that’s a large share of the asset’s life—also signal a finance lease, but the key point is that a high PV-to-FMV ratio is the clearest, defining indicator that the lease is not operating.