In short
A finance lease is a lease that transfers control of the underlying asset to the lessee in substance. For lessees, a lease is a finance lease if it meets any one of five criteria; otherwise it is an operating lease.
Key takeaways
- The five criteria: ownership transfers, a purchase option the lessee is reasonably certain to exercise, a term for the major part of the asset's economic life, payments equal to substantially all of its fair value, or a specialized asset with no alternative use to the lessor.
- The lessee reports interest expense and amortization separately, so expense is higher in the early years.
- The equivalent classification for a lessor is a sales-type lease.
Where it's tested
FAR: Leases — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under ASC 842, how does a lessee's accounting for an operating lease differ from a finance lease in subsequent periods?