Question

The FASB ASC indicates that because of special provisions normally present in leases involving terminal space and other airport facilities owned by a government unit or authority, the economic life of such facilities for purposes of classifying the lease is essentially indeterminate. Likewise, the concept of fair value is not applicable to such leases. Because such leases also do not provide for a transfer of ownership or a bargain purchase option, they are classified as operating leases. Leases of other facilities owned by a government unit or authority wherein the rights of the parties are essentially the same as in a lease of airport facilities shall also be classified as operating leases. Examples of such leases maybe those involving facilities at ports and bus terminals. The FASB specifies the conditions that must apply to meet this guidance. What are those conditions?

Answer 1

The following are the conditions:

1. The leased asset is owned by government unit or authority.

2. The leased asset is a part of a larger facility that is operated by or on behalf of the lessor.

3. The asset is a part of a permanent structure or a part of it such as a building that cannot be moved to a new location.

4. The lessor or the governmental authority has an explicit right under the lease agreement or existing statutes or regulations to terminate the lease agreement either by closing the facility containing the underlying asset or taking possession of the facility.

5. The lease agreement does not allow the lessee to purchase or otherwise acquire ownership of the underlying asset.

6. The underlying asset or an equivalent one cannot be purchased from the non governmental unit or authority in the same service area.