CFA Practice Question

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CFA Practice Question

Select the correct statement(s):

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

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.
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