Certified Government Financial Manager (CGFM) Practice Exam 2026 – Your All-in-One Guide to Exam Success!

In governmental accounting, certain criteria determine whether a lease is classified as a capital lease. A capital lease recognizes the leased asset and the associated liability on the balance sheet, treating the lease similarly to a purchase of the asset.

The criterion concerning the lease term must be at least 75% of the asset's useful life for the lease to qualify as a capital lease. Therefore, if the lease term is less than 75% of the asset's useful life, it does not meet the key test for a capital lease classification. This means that a term shorter than this threshold indicates that the asset does not provide substantial economic benefit to the lessee over its useful life, which is a fundamental aspect of capital lease classification.

In contrast, the other criteria involve conditions that favor recognizing the lease as a capital lease due to the significant rights and responsibilities that come with ownership. Should ownership be transferred at the end of the term, or if there is an option to purchase the leased property at a bargain price, these factors underscore a strong resemblance to ownership. Additionally, if total lease payments exceed 90% of the asset's fair value, the financial obligations reflect significant investment in the asset, warranting capital lease treatment.

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