- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 8. Topics in Long-Term Liabilities and Equity
- Subject 2. Lease Classification
CFA Practice Question
Select the correct statement(s):
II. If a lease with rising rental payments is classified as an operating lease, the lease expense and cash flow will be identical for the lessee.
III. It's possible that the lessee treats a lease as a capital lease but the lessor treats the same lease as an operating lease.
I. It is easier for a lease to be classified as an operating lease under IFRS standards than under GAAP.
II. If a lease with rising rental payments is classified as an operating lease, the lease expense and cash flow will be identical for the lessee.
III. It's possible that the lessee treats a lease as a capital lease but the lessor treats the same lease as an operating lease.
Correct Answer: I and III
II is false. SFAS 13 mandates the use of the straight-line method of recognizing periodic payments.
III is true. This will happen if a lease meets any of the four criteria for the lessee but not the two additional criteria for the lessor.
I is true. IFRS standards lack the quantitative criteria of SFAS 13.
II is false. SFAS 13 mandates the use of the straight-line method of recognizing periodic payments.
III is true. This will happen if a lease meets any of the four criteria for the lessee but not the two additional criteria for the lessor.
User Contributed Comments 8
| User | Comment |
|---|---|
| MFTIOA | isn't I true for capital leases more so than operating leases? |
| surjoy | I guess so.. |
| edison20 | II implies that lease expense is constant over the life of the asset. Good question. |
| GouldenOne | For II, I didn't think that lessee's report depreciation for an operating lease. Only lease payments as they occur |
| Shaan23 | I doesnt make sense. It's not easier to be classified as an Operating lease under IFRS --- It's easier to be classified as a Capital Lease It's less strict with regards to capital lease requirements. |
| Shaan23 | Tricky. From the text The Explicit standards in the US that determines when a company should report a capital lease versus an OPlease make it easier for a company to structure a lease so that it is reported as an Operating lease. |
| daverco | From the curriculum text: "US accounting standards are more prescriptive in their criteria for classifying finance and operating leases". It seems under US GAAP in both cases it's tougher vs. IFRS. |
| farhan92 | @Shaan US GAAP gives you thresholds, that if breached, will be capital lease so the lessor could for example ensure the term of the lease is just under 75% while where as the lack of thresholds given in IFRS makes that harder to do. |