Which statement is a capital lease criterion under ASC 840?

Which statement is a capital lease criterion under ASC 840?

• A. PV of payments > 90% of fair value
• B. The asset must be sold to the lessee
• C. The lease term must be shorter than 50% of the asset's economic life
• D. Bargain purchase option

Answer: (A)

Under ASC 840, a lease is treated as a capital lease when the lessee effectively gains ownership-like control through certain criteria. The most definitive quantitative test is that the present value of the minimum lease payments must be at least 90% of the fair value of the asset. This shows the lease transfers substantially all the risks and rewards of ownership even if the title doesn’t pass. The statement about the present value of payments exceeding 90% directly captures that test, which is why it is a capital-lease criterion. Other listed ideas don’t fit as the defining trigger: the asset need not be sold to the lessee for a capital lease to exist; the duration criterion relates to the lease term being long relative to the asset’s economic life (not short); and a bargain purchase option is indeed another criterion that can indicate a capital lease, but the concrete threshold highlighted here is the 90% present value rule.

Under ASC 840, a lease is treated as a capital lease when the lessee effectively gains ownership-like control through certain criteria. The most definitive quantitative test is that the present value of the minimum lease payments must be at least 90% of the fair value of the asset. This shows the lease transfers substantially all the risks and rewards of ownership even if the title doesn’t pass. The statement about the present value of payments exceeding 90% directly captures that test, which is why it is a capital-lease criterion. Other listed ideas don’t fit as the defining trigger: the asset need not be sold to the lessee for a capital lease to exist; the duration criterion relates to the lease term being long relative to the asset’s economic life (not short); and a bargain purchase option is indeed another criterion that can indicate a capital lease, but the concrete threshold highlighted here is the 90% present value rule.