ASC 840 / IAS 17 Operating Lease Example

Let’s take as an example an office lease, for a portion of an office building. It lasts for ten years. The first 5 years, the rent is $5,000 per month; the second five years, the rent increases to $6,000 per month. In many cases, the “fair value” of a portion of a building is not easily determinable. If this is true, ASC 840 allows you to skip the present value test. Such leases will, as a rule, not convey ownership, so the only test left to determine whether the lease is capital/finance is whether the lease term is 75% or more of the economic life. A building is typically assigned a life of 20 years or more, so this lease’s 10-year term is considerably less than 75%, and the lease is considered operating. Download Now to access our full ASC 840 / IAS 17 Operating Lease Example!