Tax & Accounting in Leasing Flashcards

Under ASC 842, what are the five criteria that would classify a lessee's lease as a finance lease?

Answer: Transfer of ownership, purchase option likely to exercise, lease term covers major part of useful life, PV of payments equals substantially all fair value, or specialized asset with no alternative use

Under ASC 842, any one of these five bright-line tests (ownership transfer, bargain purchase option, major economic life, substantially all fair value, or specialized asset) triggers finance lease classification.

What is 'operating lease' income recognition for a lessor under ASC 842?

Answer: Straight-line rent income over the lease term, with the leased asset remaining on the lessor's balance sheet and depreciated

For lessor operating leases under ASC 842, rental income is recognized on a straight-line basis over the lease term, and the underlying asset stays on the lessor's books and continues to be depreciated.

What is 'sale-leaseback' and what accounting issues does it raise?

Answer: A transaction where the owner sells an asset and immediately leases it back from the buyer, raising questions about whether a true sale occurred

In a sale-leaseback, the seller/lessee monetizes equity in an asset while retaining use; ASC 842 requires analysis of whether control was truly transferred to determine sale recognition.

What is 'income from continuing involvement' in the context of a leveraged lease?

Answer: The lessor's equity earnings recognized using the net investment method over the lease term, allocating income to periods of positive net investment

Under leveraged lease accounting (now legacy under ASC 842 for new leases), income is recognized in proportion to the net investment's positive balance, creating front-loaded losses and later income.

What is the 'alternative minimum tax' (AMT) concern historically related to equipment leasing tax benefits?

Answer: Accelerated MACRS depreciation and other tax preference items could trigger AMT, reducing the after-tax benefit of tax-oriented leases for corporate lessors

The corporate AMT added back tax preferences like accelerated depreciation, reducing the effective tax benefit of leveraged leases and impacting the economics of tax-oriented lease transactions.

What does 'unguaranteed residual value' mean for a lessor under ASC 842?

Answer: The portion of the equipment's residual value that is not guaranteed by the lessee or a third party, which remains a risk to the lessor

The unguaranteed residual represents the lessor's retained risk—if the equipment is worth less than this amount at lease end, the lessor absorbs that loss.