Atlanta Tours Company entered into a five-year lease on January 1, Year 1, with Duck Boats Inc. for a customized duck boat. Duck Boats Inc. will provide a vehicle to Atlanta Tours Company with the words "Gone with the Wind" carved into the sides. Following are the terms of the lease arrangement:
• Fair value of the wagon at the inception of the lease is $10,000.
• There is an eight-year estimated economic life.
• Estimated (unguaranteed) residual value is $3,500. Atlanta Tours Company does not absorb any gains or losses in the fluctuations of the fair value of the residual value.
• Annual lease payments of $2,000 are due on January 1 of each year. The implicit interest rate in the lease is 6 percent.
• There is an option to purchase at end of lease term for $4,000.
• The lease is noncancelable and may not be extended.
Required:
Discuss whether Atlanta Tours Company should classify this lease as an operating lease or as a finance lease under (a) IFRS and (b) U.S. GAAP.