ASC 842 Test - Contract Module

The ASC 842 Lease Classification Test is used to determine whether a lease is considered an Operating or a Finance lease. You can run the Lease Classification Test multiple times, as events over the life of the lease can affect your lease accounting. If your lease “passes” all five tests, it will be considered an Operating lease. If your lease “fails” one or more of the tests, it will be considered a Finance lease. Once your lease has been classified, you can generate your ASC 842 lease accounting schedule.

When an ASC 842 Test is created, the resulting record is also visible on the Accounting Assumptions page, and vice versa. However, records created on the Accounting Assumptions page will not have a value in the Final Result of the ASC 842 Test page, because the test needs to be executed prior to a final result being determined by the system.

If an ASC 842 Test is generated without an associated Accounting Assumptions record, a new Accounting Assumptions record will be generated. If the ASC 842 Test is then locked, the Accounting Assumptions record will also be locked.

To navigate to the ASC 842 Test page:

Navigate to Contract > Accounting Info > ASC 842 Test.

Use the links in the Navigation Pane on the leftmost side of the page.
Follow a procedure below.

Run a Test

If you selected a value from the Accounting Method override field on the ASC 842 Accounting Assumptions page, run the ASC 842 test, and the ASC 842 Test result is different from the value of the Accounting Method override field, the system will not save the ASC 842 Test. This is because the value of the override field takes precedence over the value of the ASC 842 Test result.

To run an ASC 842 lease classification test:

Click Add Item.

This displays in the Actions menu on the right side of the page.
Select the asset type from the Asset Type field.
Select the schedule type from the Schedule field.

Important!
Do not select the Locked? check box until you have completed the classification test. Selecting this check box will prevent you from editing the classification test.
Enter notes in the Notes field.
Test 1: Select the check box if the ownership of the asset reverts to the tenant at the end of the lease term.
Test 2: Select the check box if the lease contains a purchase option that the tenant is likely to exercise.
Test 3: Complete the following fields:
- Remaining Economic Life Threshold: The fraction of the economic life of the underlying asset that amounts to “a major part” of that remaining economic life. This value is usually set to 75%.
- Year Useful Life Began or Year Built
- Commercial Property, Standard Depreciable Life, 39. 5 years: Enter the value of the remaining economic life using the fields provided.
- Test Begin Date / Test End Date
  
  Note:
  This test compares the Remaining Economic Life of the lease to the Test Begin and End Dates. If this value is below the Remaining Economic Life Threshold, your lease will pass this test.
- Is the lease commencement at or near the end of the economic life of the asset?: If selected, Test 3’s outcome changes to Pass regardless of whether the value the Test Term Length to Remaining Life is greater than the Remaining Economic Life Threshold field.
Test 4: Complete the following fields:
- Fair Value Threshold: The fraction of the fair value of the underlying asset that amounts to “substantially all” of its fair value. This value is usually set to 90%.
- Discount Rate: The discount rate should automatically populate. The Discount Rate is also known as the Interest Rate or Internal Borrower Rate (IBR).
  
  To learn how to select a different discount rate from the Manage Discount Rates table, see our Search for Another Discount Rate article.
- PV Of Structuring Costs: Enter fees paid to the owners of a special-purpose entity for structuring the transaction.
- PV Of Other Adjustments: Enter other miscellaneous costs that should be accounted for in the schedule.
- Portion of Asset Controlled: Enter the percentage based upon the rentable area divided by the total area of the asset.
- Fair Value of Asset: FASB 842. 10. 20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
- Fair Value Source: Enter the name of the person who assessed the fair value of the asset. You can also attach a document by clicking the Attach Document .
Test 5: Select the check box if the asset has a specialized use, such as that the lessor will have no alternative use for it.
Click Run and Save.

This displays in the Actions menu on the right side of the page.

The page refreshes, and the results of the test appear in the ASC 842 Test List table at the top of the page. The test results also appear in the ASC 842 Test table above the Locked? check box.
Review your rest results. If your results are not what you expected, review the data you entered.
If you want to re-run the ASC 842 Test:
1. Make your changes.
2. Click Run and Save.
  
  This displays in the Actions menu on the right side of the page.
Once you are certain the results are correct, select the Locked? check box in the upper-right corner of the ASC 842 Test table.

Important!
Locking the test ensures that the test cannot be modified. You cannot delete a classification test once it has been locked, but you can create another test as necessary.
Click Run and Save to confirm that you want to lock the classification test.

This displays in the Actions menu on the right side of the page.
If at any point you need to run a new classification test, click Add Item.

This displays in the Actions menu on the right side of the page.

A new classification test opens.

ASC 842 Test - Contract Module

Run a Test

Delete Test

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