1. According to FASB a lease is classified as a capital or an operating lease. To be classified as a capital lease, it has to meet at least one of the criteria established by FASB. The criteria includes transferring of ownership, containing a bargain purchase option, the lease term is equal to 75 percent or more of the estimated economic life, and the present value of the minimum lease payments equals or exceeds 90 percent of the excess of the fair value of the leased property. If a lease does not meet any of the criteria, it is classified as an operating lease (FASB ASC 840-10-25-1). Capital leases will be depreciated over the term of the lease. If there is a transfer of ownership or bargain purchase option, the asset will be depreciated over the economic life (FASB ASC 840-30-35-1). To record interest expense for a capital lease, the effective interest method is used (FASB ASC 840-30-35-6).
The ISAB classifies a lease as either a financing lease or an operating lease (IAS 17.4). ? To
determine what kind of lease, it depends on the substance of the transaction rather than the form (IAS 17.10). The criteria to satisfy being a finance lease are the same as FASB?s criteria. Like FASB, IFRS depreciated in the same manner; over the shorter of the lease term or the life of the asset (IAS 17.27).
The exposure draft for leases that was established, proposes that all leases would be treated as an asset being the ?right to use? and the liability being the loan value to finance that asset. We agree with the proposal that a lessee should recognize a right-of-use asset and a liability to make lease payments because regardless if the risk of owning an asset is transferred the lessee is still responsible to making payments. Thus, the lessee should record a liability. We also agree that a lessee should recognize amortization of the right-of-use asset and interest on the liability to make lease payments because it will bring the sum of the total asset and liability to zero at?
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