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Section 8110: Classification of Leases
[U.S. GAAP Codification Topic]
840 Leases
840-10 Overall
840-20 Operating leases
840-30 Capital leases
840-40 Sale-leaseback transactions
[U.S. GAAP before the Codification]
SFAS 13, November 1976, Accounting for Leases
SFAS 22, June 1978, Changes in the Provisions of Lease Agreements Resulting from Refundings of Tax-Exempt Debt, an amendment of FASB Statement No. 13
SFAS 23, August 1978, Inception of the Lease, an amendment of FASB Statement No. 13
SFAS 27, May 1979, Classification of Renewals or Extensions of Existing Sales-Type or Direct Financing Leases, an amendment of FASB Statement No. 13
SFAS 28, May 1979, Accounting for Sales with Leasebacks, an amendment of FASB Statement No. 13
SFAS 91, December 1986, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, an amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17
SFAS 98, May 1988, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases, an amendment of FASB Statements No. 13, 66, and 91 and a rescission of FASB Statement No. 26 and Technical Bulletin No. 79-11
SFAS 145, April 2002, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections
1. 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
2. Additional criteria for lessor
(E) Collectibility of minimum lease payment
--> reasonably predictable
(F) No important uncertainties
--> about the additional costs to be incurred by lessor
--> when such costs are not reimbursable
3. Lease classification by lessee
(1) A lease satisfies any of (A), (B), (C), (D)
--> capital lease by lessee
(2) A lease satisfies none of (A), (B), (C), (D)
--> operating lease by lessee
4. Lease classification by lessor
(1) A lease satisfies any of (A), (B), (C), (D) and both of (E), (F)
--> sales-type lease, direct financing lease, or leveraged lease by lessor
(2) Other cases
--> operating lease by lessor
5. Sales-type lease
The lessor gets manufacturer's or dealer's profit or loss
6. Manufacturer's or dealer's profit or loss
--> when fair value ≠ carrying amount of the leased property
--> profit when fair value > carrying amount
--> loss when fair value < carrying amount
7. Direct financing lease
(1) The lessor does not get manufacturer's or dealer's profit
(2) A lease does not meet the leveraged lease criteria
8. Leveraged lease
(1) A lease that meets all conditions of direct financing lease
--> and all of (G), (H), (I)
(2) Leveraged lease combines two transactions into one
transaction 1: lessor borrows money and purchases the leased property
transaction 2: lessor leases the property to lessee
9. Leveraged lease criteria
(G) A lease involves at least three parties
--> a lessee, a lessor (equity participant), a long-term creditor
(H) Financing by long-term creditor
--> provides substantial leverage to the lessor
--> is nonrecourse as to the lessor's general credit
(I) Lessor's net investment
--> declines during early periods
--> rises during later periods
10. Accounting by lessee
(1) Operating lease
--> Rent is charged to expense by the lessee
(2) Capital lease
--> Recognized as an asset and a liability by the lessee
11. Accounting by lessor
(1) Operating lease
--> Rent income is recognized by the lessor
--> The leased property continues to be reported as an asset by the lessor
--> The leased property is depreciated by the lessor
(2) Sales-type lease
--> The lessor records the lease same as a sale of the property
--> Sales, cost of goods sold, lease receivable, unearned income are recognized by the lessor
(3) Direct financing lease
--> Asses is derecognized from the lessor's records
--> Lease receivable, unearned income are recognized by the lessor
(4) Leveraged lease
--> The lessor recognizes the following:
(4a) rentals receivable
(4b) unearned and deferred income
(4c) residual value of leased property
(4d) investment tax credit, if applicable
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