Which statement about the 90% fair value test under ASC 840 is true?

Which statement about the 90% fair value test under ASC 840 is true?

• A. Lessors may use different implicit rates to calculate the 90% FMV test.
• B. The test applies only to lessees.
• C. The test is used to determine depreciation methods.
• D. The test is no longer used after 2000.

Answer: (A)

The main idea here is how leases are classified under ASC 840 using the 90% fair value test. At lease inception, you compare the present value of the minimum lease payments to 90% of the asset’s fair value. If that present value is at least 90% of fair value, the lease is classified as a capital (finance) lease for the lessee (and, for the lessor, this criterion helps distinguish between sales-type or direct-financing leases). To compute that present value, you use the rate implicit in the lease if it can be determined. If the implicit rate isn’t readily determinable, you use the lessee’s incremental borrowing rate. Because the rate is tied to each specific lease contract, different leases can have different implicit rates. That’s why lessors may use different implicit rates when applying the 90% fair value test. The other statements aren’t correct for this concept: the test applies to both lessees and lessors and is used for classification, not for setting depreciation methods, and it’s a current part of ASC 840’s framework (even though later standards updated lease accounting).

The main idea here is how leases are classified under ASC 840 using the 90% fair value test. At lease inception, you compare the present value of the minimum lease payments to 90% of the asset’s fair value. If that present value is at least 90% of fair value, the lease is classified as a capital (finance) lease for the lessee (and, for the lessor, this criterion helps distinguish between sales-type or direct-financing leases).

To compute that present value, you use the rate implicit in the lease if it can be determined. If the implicit rate isn’t readily determinable, you use the lessee’s incremental borrowing rate. Because the rate is tied to each specific lease contract, different leases can have different implicit rates. That’s why lessors may use different implicit rates when applying the 90% fair value test.

The other statements aren’t correct for this concept: the test applies to both lessees and lessors and is used for classification, not for setting depreciation methods, and it’s a current part of ASC 840’s framework (even though later standards updated lease accounting).