Accounting For Leases

Classification of leases – US GAAP

If the lease agreement meets at least one of the criteria, it should be classified as a capital lease on the lessee’s books, and recognized as an asset on the balance sheet:

Lessee owns property at the end of the lease
Option to buy the property at a bargain at the end of the lease
Lease term is at least 75% of the estimated useful life of the leased property
PV of minimum lease payment (excluding maintenance, insurance & taxes) is at least 90% of property’s fair value.
Classification of leases – IFRS (IAS 17)

Lessee owns property at the end of the lease
Option to buy the property at a bargain at the end of the lease
Lease term is for major part of the economic life of the asset, even if title is not transferred
At lease inception, PV of minimum lease payment is most of property’s fair value.
Leased assets are specialized to the degree that only the lessee can use them without major modifications.
Under both standards, a lease that is not a capital lease is an operating lease. Only leases that cannot be cancelled may be capitalized.

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