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es, and improvements, choose Check for Updates. 24. GENERAL ISSUES -LEASE CLASSIFICATION TESTS YES/NO # QUESTION YES/NO A. The Lease Classification Tests do NOT need to be applied by the Lessee in the instance where the lease term is 1 year or shorter. In this case, the lease qualifies for the exception to the new lease accounting rules, and as a result the lease contract will be carried "off balance sheet." B. If a Lessee prefers to account for a lease contract as a Finance Lease it should negotiate the lease terms with the Lessor so that AT LEAST ONE of the Lease Classification Tests is passed. All that is needed for a lease to qualify as a Lessee's Finance Lease is that 1 of the 5 Lease Classification Tests is passed. C. The only way for a Lessee to account for a long-term lease contract (more than 1 year in term) as an Operating Lease under the new rules is to negotiate the terms with the Lessor so that NONE of the Lease Classification Tests are passed. To qualify for the Lessee's Operating Lease accounting, the lease must fail ALL five of the Lease Classification Tests. Apply the Lease Classification Test to a Hypothetical Lease Contract ("HYPER") 1. Transfer of Ownership Test: Hyper's terms never transfer ownership of the leased asset to the lessee. Has the "transfer of ownership test" been passed? 2. Purchase Options Test: Hyper grants no "purchase option to the lessee, bargain or otherwise. The lessee is free to open a negotiation for the outright purchase of the asset at any time. That would constitute a contract apart from the lease. Has the "purchase option test" been passed? 3. Lease Term Test (or the 75% Test) This Test requires that the lease term is 75% or more of the economic life of the leased asset. In Hyper, the lease term is 4 years, the lease contract cannot be cancelled. The economic life of the asset is estimated as 10 years. Has the Lease Term Test been passed? 1 4. Present Value Test Under the terms of Hyper, the present value of the lease payments are substantially less than 65% of the Fair Market Value of the leased asset. Has the Present Value Test been passed? 5. Alternative Use Test Under the terms of Hyper the Lessor makes no modifications to the leased asset. At the conclusion of this lease, the lessor will be able to rent it to many other clients, as long as they accept this generic version of the asset. Has the Alternate Use Test (meaning "no alternate use to the Lessor") test been passed? (Answer "no" If the Lessor retains a viable alternate use.) CONCLUSION Is the HYPER lease contract a Finance Lease? b. Will the Right of Use asset in Hyper be amortized "straight line," and as a separate expense from interest expense in, the income Statement? a. States

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