Group I criteria provide guidance to operationalize the concept of ownership and control of an asset. To meet the Group I criteria, a transaction only needs to meet one of the five criteria. List those five criteria.

Question

Quizplus · Accepted Answer

The Answer is 1. The lease transfers ownership of the leased asset to the lessee at the end of the lease term. If the lease transfers ownership, then the lessee firm has, in essence, purchased the asset.
2. The lessee is given an option to purchase the asset that the lessee is reasonably certain to exercise. For example, it might be reasonably certain that the lessee would exercise a purchase option if the specified purchase price is well below the expected value of the leased asset at the completion of the lease term.
3. The lease term is for a major part of the economic life of the asset. If the lease term provides the lessee the use and control over substantially all of the asset's useful life, then the agreement should be considered equivalent to purchasing the asset.
4. The present value of the sum of the lease payments and any residual value the lessee guarantees to pay (that is not otherwise included in the lease payments) is equal to substantially all of the asset's fair value. The present value computation includes lease payments in the renewal periods, if any. Meeting this criterion implies that the lessee is providing the lessor compensation that is equivalent to the purchase of the asset.
5. The leased asset is of a specialized nature. An asset with a specialized nature has no alternative use to the lessor at the end of the lease term. Because the asset has no alternative use to the lessor, its specialized nature implies that the lessor must have transferred control over the asset to the lessee.

Group I Criteria Provide Guidance to Operationalize the Concept of Ownership