Leases
SFAS 13, November 1976
“Accounting for Leases”
“Accounting for Leases”
Lease classification criteria
(A) Ownership transfer
–> Ownership is transferred by the end of the lease term
(B) Bargain purchase option
-> Lessee has an option purchase at the price lower than the fair value
(C) Lease term: 75% rule
–> Lease term ≥ 75% of economic life of the leased property
(D) Minimum lease payment: 90% rule
–> Present value of minimum lease payments > 90% of fair value of the leased property
–> Ownership is transferred by the end of the lease term
(B) Bargain purchase option
-> Lessee has an option purchase at the price lower than the fair value
(C) Lease term: 75% rule
–> Lease term ≥ 75% of economic life of the leased property
(D) Minimum lease payment: 90% rule
–> Present value of minimum lease payments > 90% of fair value of the leased property
Operating lease by lessee
A lease satisfies none of (A), (B), (C), (D)
Operating lease by lessor
1. A lease is classified as an operating lease by lessor
–> if it is not classified as one of the following:
(1) sales-type lease
(2) direct financing lease
(3) leveraged lease
–> if it is not classified as one of the following:
(1) sales-type lease
(2) direct financing lease
(3) leveraged lease
2. Sales-type, direct financing, leveraged leases are explained in 840-30
Operating lease accounting by lessee
–> Rent is charged to expense by the lessee
Operating lease accounting by lessor
1. The leased property continues to be reported as an asset by the lessor
2. The leased property is depreciated by the lessor
3. Rent income is recognized by the lessor
2. The leased property is depreciated by the lessor
3. Rent income is recognized by the lessor