Capital Lease Test - Contract Module
The Capital Lease Test helps you to determine whether a lease is an operating or a capital lease. If the lease fails one or more of these tests, it qualifies as a capital lease and must be declared on the lessee's balance sheet. This lease classification test is for the FAS13 accounting standard.
Public business entities are required to adopt ASC Topic 842 for reporting periods beginning after December 15, 2018. That means an effective date of January 1, 2019 for public entities with a December 31 year end. Nonpublic entities have an extra year to adopt. All entities may elect to early-adopt (American Institute of Certified Public Accountants, Inc. 2016). To learn more, read the AICPA's summary of the new ASC 842 standard.
The ASC 842 Test functions similarly to the Capital Lease Test, but has additional functionality. The ASC 842 Test page allows you to save records of each test, so that you can refer back to the results of previous tests. The only difference between the Capital Lease Test and the ASC 842 Test page is that the ASC 842 Test has an additional component, Test 5, which asks whether the asset has a specialized use.
For your FAS13 leases, we recommend that you utilize the ASC 842 Test page to determine the classification of your lease, skip Test 5, and add comments to the Notes for auditing purposes.
To view the Capital Lease Test page:
Operating lease definition
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From the perspective of a lessee, any lease other than a capital lease.
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From the perspective of a lessor, a lease that meets the conditions in paragraph FASB 840. 10. 25. 43(d): "A lease is an operating lease if it does not meet any of the four criteria in paragraph 840-10-25-1 or both of the criteria in the preceding paragraph. This includes a lease that involves real estate and gives rise to manufacturer's or dealer's profit (or loss) to the lessor but that does not meet the criterion in paragraph 840-10-25-1(a)."
Capital lease definition
From the perspective of a lessee, a lease that meets any of the four lease classification criteria in paragraph FASB 840. 10. 25. 1.
To run a capital lease test:
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Click Edit.
This displays in the Actions menu on the right side of the page.
The page becomes editable.
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Test 1: Select if the ownership of the asset reverts to the tenant at the end of the lease term.
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Test 2: Select if the lease contains a purchase option that the tenant is likely to exercise.
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Test 3: Complete these fields:
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Year Built or Year Useful Life Began
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Remaining Useful Life (39. 5 years for commercial property or other number): Remaining useful life. The Economic Useful Life is the estimated remaining period during which the property is expected to be of economic use by one or more users, with normal repairs and maintenance, for the purpose that it was intended at the inception of the lease.
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Test 4: Complete these fields:
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Amount of Operating Expense in Base Rent (per unit Leased): Amount of operating expenses included the base rent.
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Amount of Real Estate Taxes in Base Rent (per unit Leased): Amount of real estate taxes included in the base rent.
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Other Base Rent Adjustments (per unit Leased): Amount of exclusions, other than operating expenses and taxes, from base rent.
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Discount Rate: Automatically populates. The Discount Rate is also known as the Interest Rate or Internal Borrower Rate (IBR).
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Aggregate NNN Base Rent Value over the Term of the Lease: Present value of NNN rent over the analysis period. The "lease term".
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Gross Lease Area - Building: Total area of the building.
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Gross Lease Area - Land: Total area of the lot that the building occupies.
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Rentable Area - Land: Area of any additional land that may be leased under the contract.
For example, a parking lot.
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Fair Market Value (FMV) of the Total Space in Building or Center - Building: Price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.
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Fair Market Value (FMV) of the Total Space in Building or Center - Land: Fair market value of the land.
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Source of FMV: Name of the person who assessed the fair value of the asset.
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Click Run Model in the Actions menu.
Test results are displayed in the upper-right section of the page, in the Test Conclusion column.
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If the result of your capital lease test is not what you expected:
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Review the data entered in your capital lease test.
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Make any necessary changes.
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Click Run Model in the Actions menu.
Test results are displayed in the upper-right section of the page, in the Test Conclusion column.
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If necessary, repeat these steps.
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To clear the data from your capital lease test, click Clear Model Results in the Actions menu.
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Once you are satisfied with the results of your capital lease test, click Save Changes in the Actions menu.
Your changes are saved. The page returns to view mode.
To edit your capital lease test:
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Click Edit in the Actions menu.
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Make your changes.
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Click Run Model in the Actions menu.
Test results are displayed in the upper-right section of the page, in the Test Conclusion column.
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If the result of your capital lease test is not what you expected:
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Review the data entered in your capital lease test.
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Make any necessary changes.
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Click Run Model in the Actions menu.
The results of the test appear in the upper-right section of the page, in the Test Conclusion column.
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If necessary, repeat these steps..
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To clear the data from your capital lease test, click Clear Model Results in the Actions menu.
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Once you are satisfied with the results of your capital lease test, click Save Changes in the Actions menu.
Your changes are saved. The page returns to view mode.
Run a Capital Lease Test