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					                               FASB Statement 13 Accounting for Leases
                              Tests Used in the Classification of a Lease for
                                     Capital or Operating Treatment
                                                                                                Prepared by:                                     Date:
                                                                                                Reviewed by:                                     Date:




PURPOSE
The purpose of this checklist and worksheet is to aid in determining if a lease agreement should be recorded as an
operating or capital lease.

BACKGROUND:
The Financial Accounting Standards Board (FASB) established principles for lease accounting in its Statement 13, Accounting for Leases ,
and its numerous amendments. These statements specify the appropriate accounting for leases through their classification as either capital or operating.


  To be an Operating Lease the transaction must pass all four criteria. A capital lease must meet one or more of the following
                                                           criteria:


1. The lease transfers ownership of the property to the lessee by the end of the lease term

2. The lease contains a bargain purchase option

3. The lease term is equal to 75% or more of the estimated economic life of the leased property.
However, if the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased property, including earlier years of use,
this criterion shall not be used for purposes of classifying the lease.

4. The present value of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance,
and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90% of the excess of the fair value of the leased property to the lessor.


CHECKLIST

Obtain lease agreement for review, both Master Lease and Schedule

Complete 'ownership' tab to test condition #1 and #2:
                                                   Condition #1                                 Possibly Operating
                                                   Condition #2                                 Possibly Operating
IF RESULT IS 'POSSIBLY OPERATING', THEN:
Complete 'Term' tab to test condition #3                                                        Possibly Operating

IF RESULT IS 'POSSIBLY OPERATING', THEN:
Complete 'PVMinimum' tab to test condition #4                                                   Capital

IF CAPITAL AT ANY TIME, THEN:

Record at the lower of the PV of the minimum lease payments or the
fair value of the equipment.

Calculate an offsetting obligation amortization schedule using the payments and value,
solving for the implicit interest rate.

Draft journal entries for the Corporate Controller to review


IF OPERATING:

Calculate total rent expense for the life of the contract
Divide by number of months and book this amount as expense
Differential between what was paid and expensed booked to deferred rental account
        1. The lease transfers ownership of the property to the lessee by the end of the lease term



Condition #1

        Is the property to be transferred to lessee at the end of the lease term?                              no


                                                                         Classification            Possibly Operating

        2. The lease contains a bargain purchase option

Condition #2
        Doe the lease contain a "bargain purchase option"?                                                     no
        FAS 13 definition
        d. Bargain purchase option. A provision allowing the lessee, at his option, to purchase the leased property
        for a price which is sufficiently lower than the expected fair value of the property at the date the option
        exercisable that exercise of the option appears, at the inception of the lease, to be reasonably assured.
        Estimated fair value at end of lease term                                                                     $0

        Purchase Option                                                                                               $0


                                                                         Classification            Possibly Operating
3. The lease term is equal to 75% or more of the estimated economic life of the leased property.
However, if the beginning of the lease term falls within the last 25% of the total estimated economic life
of the leased property, including earlier years of use, this criterion shall not be used for purposes of
classifying the lease.


                                        Months         Years
               Lease Term                         36           3
            Useful Life Allowed
            under FASB 13 Test                    45       3.75

          Useful Life of Product                  60

                                   Possibly
                     RESULT        Operating
 of the leased property.
he total estimated economic life
 not be used for purposes of
4. The present value of the minimum lease payments, excluding that portion of the payments representing executory costs
such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90% of the
fair market value of the leased property




                                                                                  INPUT FIELDS

Fair value                            $     100,000.00 Obtain from lease agreement or consult with purchaser

# of minimum payments                                  36
Payment amount                        $         2,900.00

Guaranteed residual value             $              -

Incremental cost of capital                      8.500%

PV of Payments                              $92,517.25
Guaranteed Residual                   $            -
Total                                       $92,517.25

90% of Fair Value                     $        90,000.00

RESULT                               Capital

				
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