How may ASC 840 differ between lessor and lessee in applying the 90% of fair value test?

How may ASC 840 differ between lessor and lessee in applying the 90% of fair value test?

• A. There is no difference; both use the same approach.
• B. Lessor excludes residuals guaranteed by third parties, while lessee includes them.
• C. Lessor includes residuals guaranteed by third parties and lessee does not when calculating 90% FMV.
• D. Only the lessee uses the 90% FMV test to classify leases.

Answer: (C)

In ASC 840, the 90% of fair value test for lease classification hinges on how you treat residual guarantees, and the treatment differs for the lessor and the lessee. For the lessor, when calculating the 90% threshold, you include residuals guaranteed by third parties in the fair value (FMV) of the asset. This increases the FMV against which the present value of minimum lease payments is compared, reflecting the additional recovery from those guaranteed residuals. For the lessee, you do not include third-party guaranteed residuals in the fair value used for the 90% test. The calculation focuses on the lessee’s minimum lease payments (and related components) without adding those guaranteed residuals. Therefore, the 90% FMV test can differ between the two parties because the lessor factors in third-party guarantees into FMV, while the lessee does not. This is why the correct understanding is that the lessor includes third-party guaranteed residuals and the lessee does not.

In ASC 840, the 90% of fair value test for lease classification hinges on how you treat residual guarantees, and the treatment differs for the lessor and the lessee. For the lessor, when calculating the 90% threshold, you include residuals guaranteed by third parties in the fair value (FMV) of the asset. This increases the FMV against which the present value of minimum lease payments is compared, reflecting the additional recovery from those guaranteed residuals.

For the lessee, you do not include third-party guaranteed residuals in the fair value used for the 90% test. The calculation focuses on the lessee’s minimum lease payments (and related components) without adding those guaranteed residuals.

Therefore, the 90% FMV test can differ between the two parties because the lessor factors in third-party guarantees into FMV, while the lessee does not. This is why the correct understanding is that the lessor includes third-party guaranteed residuals and the lessee does not.