In short
A lessee classifies a lease as a finance lease if any one of five criteria is met: ownership transfers, a purchase option is reasonably certain to be exercised, the term is a major part of the asset's remaining life, payments are substantially all of its fair value, or the asset is so specialized it has no other use.
Key takeaways
- Common thresholds are 75% or more of economic life and 90% or more of fair value.
- Payments include any residual value guaranteed by the lessee.
- A lessor uses the same criteria to identify 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
A lessee enters into a 4-year lease for equipment with a 10-year remaining economic life. There is no purchase option and ownership does not transfer. The present value of lease payments is 55% of the equipment's fair value. How should the lessee classify this lease?