“(b) The lease contains a bargain purchase option.
“(c) The lease term is equal to 75 percent or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease.
“(d) The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the Lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the Lessor at the inception of the lease over any related investment tax credit retained by the Lessor and expected to be realized by him.
However, if the beginning of the lease term falls within the last 25 percent of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease. … A Lessee shall compute the present value of the minimum lease payments using his incremental borrowing rate unless (i) it is practicable for him to learn the implicit rate computed by the Lessor and (ii) the implicit rate computed by the Lessor is less than the Lessee’s incremental borrowing rate. If both of those conditions are met, the Lessee shall use the implicit rate.”
A capital lease is considered to transfer “substantially all of the benefits and risks incident to the ownership of property [and therefore] should be accounted for as the acquisition of an asset and the incurrence of an obligation by the Lessee. … [T]he economic effect on the parties is similar, in many respects, to that of an installment purchase.”
In ASC 842, IFRS 16, and GASB 87, a capital lease is called a finance lease. See that definition for the slightly changed criteria. Existing capital leases under FAS 13 are not reclassified.