What is the 90% threshold for net present value for determining whether a lease is finance or operating?
If the net present value of lease payments is greater than 90% of the fair market value, then it should be classified as a finance lease and not an operating lease. This is captures in “N” in the visual below.
For example, if Nicole leased a snowmobile from Lake Tahoe Enterprises, and the NPV of future minimum lease payments was $95,000, then we would compare that to the fair market value of the snowmobile. If the FMV of the snowmobile was $100,000, that means that the NPV of the lease payments represents 95% of the assets value. Since that is greater than 90%, then the lease qualifies as a finance lease.
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