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Question 1

The fair value for an asset or liability is measured as

• the appraised value of the asset or liability
• the price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants
• the price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants
• the cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.

Answer 1

the price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants

Question 2

Swift entered into a 5 year lease with Taylor Inc. The lease does not transfer ownership at the end of the lease term, and it includes a purchase option which is not reasonably expected to be exercised by Swift. The leased asset has:

A 10-year economic life.
No residual value.
A present value of the annual lease payments equal to 80% of the asset’s fair value.

If the asset has no alternative use to Taylor at the end of the lease, how should Swift classify the lease?

Answer 2

A finance lease

The 5 criteria:

Does the lease transfer ownership of the asset to the lessee? No
Does the lease contain a purchase option which is reasonably expected to be exercised by the lessee? No
Is the lease term 75% of the asset’s useful life? No (5/10 years is only 50%)
Is the present value of the lease payments at least 90% of the assets FMV? No (80% in this case)
Is the asset of such a specialized nature that it has no alternative use to the lessor after the lease? Yes