CFA Practice Question

CFA Practice Question

A lessee has leased some equipment from a lessor for 3 years and classified it as an operating lease. The collectibility of the lease payments is reasonably predictable and no important uncertainties surround the amount of unreimbursable costs to be incurred by the lessor under the lease. There are no manufacturing or dealer profits involved in the deal nor has the lessor levered it. The lessor must classify the deal as ______.
A. a direct-financing lease.
B. an operating lease.
C. a sales-type lease.
Explanation: A lessor can classify the lease as a direct-financing or a sales-type lease only if it can be classified as a capital lease by the lessee (and then again, there are additional conditions). If the lessee classifies the lease as an operating lease, then the lessor must automatically classify it as an operating lease, too.

User Contributed Comments 4

User Comment
aravinda But the Lessor continue to keep the asset on his balance sheet , right and he continues to depreciate the asset.. so why Lessor should call it a operating lease
jpducros Under US Gaap, you need the following :
1- any one of the finance lease criteria for lessees is met.
2- collectibility of lease payments is reasonibly certain
3- the lessor has substantially completed performance
==> the lessor must treat it as a financial lease; otherwise Operating lease. Here condition 1 is not met, so it will be operating lease.
berns23 Still confused..both lessor and lessee classify as operating lease? more clarification needed here pls.
GBolt93 If the lessee classifies it as an operating lease then it doesn't meet any of the 4 criteria for capital leases (PV of MLP's=90% of cost, life of lease =75% of useful life, bargain purchase agreement, or transfer of ownership). Lessor's have those same criteria, meaning they also can't classify as a capital lease. (They have two additional requirements being collectability, and no uncertainties in their future obligations). Essentially a lessor may classify a lease as operating and a lessee as capital, but if a lessee classifies it as operating the lessor will always classify it as operating as well.
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