Financial Accounting and Reporting-CPA Practice Exam

What generally dictates the depreciable life of a leased asset?

1. The asset's life

2. The lease's term

3. A combination of both

4. None of the above

The correct answer is: A combination of both

The depreciable life of a leased asset is typically dictated by a combination of the asset's economic life and the terms of the lease. When determining the depreciable life, one must consider the expected useful life of the asset, which reflects how long the asset can be utilized effectively in operations, as well as the specific terms of the lease agreement, which may dictate a shorter time frame for depreciation purposes. If the lease term is shorter than the asset's useful life, the asset may need to be depreciated over the lease term, especially in situations where the lease is considered a "finance lease" (or capital lease). This approach ensures that the depreciation aligns with the period over which the lessee has control and can derive economic benefits from the asset. In cases where the lease is longer or matches the asset's life, it is important to evaluate both factors to determine a reasonable depreciable life that accurately reflects the usage and the economic realities of the arrangement. This practice maintains compliance with accounting standards and provides transparent financial reporting. Thus, considering both the asset's life and the lease's term is essential for determining the correct depreciable life.