A lease is accounted for as a short-term lease if the present value of the lease payments is at least 90 percent of the fair value of the leased property.

Question

Quizplus · Accepted Answer

The statement provided in the input question is actually a description of a finance lease, not a short-term lease. In accounting standards, such as the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP), a lease is classified as a finance lease (or capital lease under older GAAP rules) if it meets certain criteria, one of which is that the present value of the lease payments is at least 90 percent of the fair value of the leased property. This is sometimes referred to as the "90% test."
A short-term lease, on the other hand, is defined differently. Under IFRS 16, a short-term lease is a lease that, at the commencement date, has a lease term of 12 months or less and does not contain a purchase option that the lessee is reasonably certain to exercise. Short-term leases do not require the lessee to recognize a right-of-use asset and a lease liability. Instead, lease payments are typically recognized as an expense on a straight-line basis over the lease term.
Therefore, the correct answer to the input question is that a lease is not accounted for as a short-term lease based on the present value of the lease payments being at least 90 percent of the fair value of the leased property. That criterion is for finance lease classification. A short-term lease is determined by the length of the lease term and the absence of a purchase option that is likely to be exercised.

A Lease Is Accounted for as a Short-Term Lease If