Rule Atlas
FASB ASC 842: Lease Accounting Under ASC 842: A Strategic Guide for Management Accountants
Under FASB ASC 842 (IMA / ICMA), lease Accounting Under ASC 842: A Strategic Guide for Management Accountants establishes the authoritative rules tested on the IMA CMA. Master ASC 842 by learning a repeatable framework for lease classification. VoraPrep verifies every threshold, worked table, and practice question below against the current IMA CMA blueprint.
Current Statutory Thresholds & Limits in Effect
Both finance and operating leases (>12 months) record a Right-of-Use (ROU) asset and lease liability on the balance sheet.
Worked Example: Innovate Corp's Equipment Lease
| Term | Value |
|---|---|
| Lease Term | 4 years |
| Annual Payment (at year-end) | $25,000 |
| Asset Fair Value | $95,000 |
| Asset Economic Life | 5 years |
| Incremental Borrowing Rate | 6% |
Nexus Manufacturing enters into a 5-year lease for specialized production equipment that has an estimated useful life of 8 years. The lease agreement specifies that the title to the equipment will transfer to Nexus at the end of the lease term. Nexus correctly classifies this as a finance lease. How should Nexus account for the depreciation of the right-of-use asset?
Worked Example: Innovate Corp's Equipment Lease
Scenario: Innovate Corp. leases a specialized 3D printer. The terms are:
- | Term | Value | | :--- | :--- | | Lease Term | 4 years | | Annual Payment (at year-end) | $25,000 | | Asset Fair Value | $95,000 | | Asset Economic Life | 5 years | | Incremental Borrowing Rate | 6% |
- Step 1: Classify the Lease using OWNES criteria Ownership Transfer? No. Written Purchase Option? No. Ninety Percent Test? The PV factor of an ordinary annuity for 4 periods at 6% is 3.46511. PV = $25,000 3.46511 = $86,628. Is $86,628 ≥ 90% of $95,000? ($95,000 0.90 = $85,500). Yes, $86,628 > $85,500. The 'N' criterion is met. Economic Life Test? Is 4 years ≥ 75% of 5 years? (5 0.75 = 3.75 years). Yes, 4 > 3.75. The 'E' criterion is also met. Specialized Asset? The scenario does not state this.
- Since at least one criterion is met (in this case, two are), this is a Finance Lease.
- Step 2: Initial Measurement Lease Liability: We already calculated this for the 'N' test. The initial lease liability is $86,628. Right-of-Use Asset: Assuming no initial direct costs, prepayments, or incentives, the ROU Asset is also $86,628.
Common IMA CMA Distractors on FASB ASC 842
- 1On the exam, lease questions are designed to test your systematic approach. Follow this framework to deconstruct any lease scenario:
- 2Step 2: Classify the Lease with OWNES. This is the most critical step. Methodically go through each of the five OWNES criteria. Document a 'yes' or 'no' for each one. Remember, if you get even one 'yes', the analysis stops, and it's a finance lease.
- 3A lease must be classified as a Finance Lease if it meets any one of the five "OWNES" criteria. This mnemonic is critical for the exam. If none of the criteria are met, it is an Operating Lease.
- 4Ownership: The lease transfers ownership of the asset to the lessee by the end of the lease term.
- 5Written Purchase Option: The lease contains a purchase option that the lessee is reasonably certain to exercise.
Frequently Asked Questions: FASB ASC 842
What is the core rule under FASB ASC 842 (Lease Accounting Under ASC 842: A Strategic Guide for Management Accountants)?
Under FASB ASC 842 (IMA / ICMA), lease Accounting Under ASC 842: A Strategic Guide for Management Accountants establishes the authoritative rules tested on the IMA CMA. Master ASC 842 by learning a repeatable framework for lease classification. VoraPrep verifies every threshold, worked table, and practice question below against the current IMA CMA blueprint.
How is FASB ASC 842 tested on the IMA CMA?
On the exam, lease questions are designed to test your systematic approach. Follow this framework to deconstruct any lease scenario: Step 2: Classify the Lease with OWNES. This is the most critical step. Methodically go through each of the five OWNES criteria. Document a 'yes' or 'no' for each one. Remember, if you get even one 'yes', the analysis stops, and it's a finance lease.
Where can I practice IMA CMA questions on Lease Accounting Under ASC 842: A Strategic Guide for Management Accountants?
Test yourself instantly with the free playable IMA CMA question on this page, or launch VoraPrep's full IMA CMA adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cma.