Beyond ASC 840 criteria, what additional conditions must be met to classify as a capital lease?

• A. Collectibility is reasonably certain
• B. No important uncertainties surround the amount of non-reimbursable costs
• C. Both of the above
• D. Neither of the above

Answer: (C)

Beyond the standard ASC 840 criteria, you also need two qualitative assurances to classify a lease as a capital lease. First, the lease payments must be reasonably collectible—if there’s significant doubt that the payments will be received, recognizing an asset and liability for a capital lease would not reflect the economic reality. Second, there must be no important uncertainties about the amount of non-reimbursable costs the lessee will bear—the minimum lease payments need to be reliably determinable, including fixed components and any unavoidable costs. When both conditions are satisfied (in addition to meeting one of the ASC 840 criteria), the lease is treated as a capital lease. If either condition isn’t met, the lease would more appropriately be classified as operating.