What does finance lease mean on the CPA exam?
Finance lease. A lessee lease that meets one of five transfer-of-control tests. Interest and amortization are reported separately, which front-loads total expense.
Defined against ASC 842-10-25-2.
Which CPA exam sections use finance lease?
Finance lease appears in 6 CPA exam sections: AUD, BAR, FAR, ISC, REG, TCP.
What is the difference between finance lease and operating lease?
Both put the same right-of-use asset and lease liability on the balance sheet with the same entry at commencement. Classification changes only the expense pattern and the caption: a finance lease reports front-loaded interest plus straight-line amortization, an operating lease reports one straight-line lease cost. Total expense over the term is identical either way. (ASC 842)
Other terms defined against ASC 842-10
- direct financing lease: A lessor lease where control transfers only because a third-party guarantee makes collection probable.
- lease term: The non-cancellable period, plus any option period the lessee is reasonably certain to take, plus any period controlled by the lessor.
- sales-type lease: A lessor lease that transfers control of the asset, so the lessor derecognizes it and records selling profit at commencement.
Related terms
- operating lease: A lease that does not transfer control.
- lease liability: The lessee's obligation to make the remaining lease payments, measured at their present value.
- right-of-use asset: The lessee's asset representing its right to use the leased item for the lease term.
- carve-out method: Excludes a subservice organization's control objectives and controls from both the description and the scope of the service auditor's report.