Discuss the lease capitalization

Reference no: EM131529881

Question: One of the four capitalization tests of SE{S No. 13is that the lease term is 75 percent or more of the assets remaining economic life. Lease term is defined as follow sin SFAS No. 13 (as amended by SFAS No. 98, para. p;" The fixed non can cell able term of the lease plus

(i) all periods, if any, covered by bargain rental options,

(ii) all periods, if any, for which failure to renew the lease imposes a penalty on the lessee in an amount such that renewal appears, at the inception of the lease, to be reasonably assured,

(iii) all periods, if any, covered by ordinary renewal options during which a guarantee by the lessee of the lessors debt related to the leased property is expected to be in effect,

(iv) all periods, if any, covered by ordinary contingency,

(v) only with the permission of the lessor,

(vi) only if the lessee enters into a new lease with the same lessor, or

(vii) only upon payment by the lessee of a penalty in an amount such that continuation of the lease appears, at inception, reasonably assured shall be considered "noncancelable" for purposes of this definition.

Required: How can this test be circumvented through either the structuring of the lease contract or interpretation of the test? What are other ways in which lease capitalization could be avoided through the structuring of lease terms or interpretation of the tests? What problem does this exercise illustrate?

Reference no: EM131529881

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