For a Lessee, a lease that meets one or more of the following criteria:
- The lease transfers ownership of the underlying asset to the Lessee by the end of the lease term.
- The lease grants the Lessee an option to purchase the underlying asset that the Lessee is reasonably certain to
- The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease.
- The present value of the sum of the lease payments and any residual value guaranteed by the Lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30- 5(f) equals or exceeds substantially all of the fair value of the underlying asset.
- The underlying asset is of such a specialized nature that it is expected to have no alternative use to the Lessor at the end of the lease ” [84210-20]
“When determining lease classification, one reasonable approach to assessing the criteria in paragraphs 842-10-25-2(c) through (d) and 842-10-25-3(b)(1) would be to conclude:
- Seventy-five percent or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset.
- A commencement date that falls at or near the end of the economic life of the underlying asset refers to a commencement date that falls within the last 25 percent of the total economic life of the underlying asset.
- Ninety percent or more of the fair value of the underlying asset amounts to substantially all the fair value of the underlying asset.” [842-10-55-2] In other words, the same tests as for FAS 13 may be used.
Finance leases result in a liability set up equal to the present value of the rents; the liability is then amortized using the interest method, with interest and principal repayment recognized over the life of the lease. The initial Right-of-Use asset is the same as the initial liability, with adjustments for initial direct costs, rent paid on or before the begin date of the lease, and lease incentives.
IAS 17: Essentially the same criteria are used as for ASC 842, though the explicitly authorized approach of 842-10-55-2 is not listed.
IFRS 16: All leases are considered finance leases, unless they are short term or of low-value assets.