Criteria for capitalizing a lease

Very impressive.  I’m with this finance type recently; a C-suite that hasn’t lost his skills.  He asks me a question that I knew at one point in time, but can’t quite recall the answer.  The question isn’t really important, but let’s just say that it’s one of those questions that people just don’t remember after a while.  I responded saying that’s like me asking you to remember the 4 criteria on why you would capitalize a lease.

And he said, oh, well, I haven’t thought of that in years, but if I had to take a stab…and he listed all 4 dead bang.  It even made me remember the 4 criteria.  I was so impressed.  I have decided to record them here so I never forget.

capital lease if it meets any one of these four rules:
– lease life exceeds 75% of the life of the asset
– transfer of ownership to the lessee at the end of the lease term
– an option to purchase the asset at a “bargain price” at the end of the lease term
– PV of the lease payments, discounted at an appropriate discount rate, exceeds 90% of the FMV of the asset

Now, it should be noted that this person recently sat for CPA renewal, so that might have something to do with it.  I had no such continuing education requirements that required me to study a bunch of stuff.  That made me feel slightly better.

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