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Lease classification

□ For real estate leases, the cost of moving to another location and any related disruption to
operations

□ For equipment leases, the cost of any disruption to operations that would be experienced by
changing equipment

□ The contractual terms associated with extending or terminating the lease term; for example, the
lease payments during a renewal period, any termination payments, and whether those payments
are fixed, variable, or contingent

□ The importance of the leased asset to the lessee’s operations; for example, a headquarters building
might be so closely associated with the lessee’s image that it makes the possibility of relocation
remote, or a particular facility or unit of equipment might be so integral to a manufacturing
process that either purchase or continuation of the lease is reasonably certain

□ Leasehold improvements or other assets whose value would be impaired if the lessee were to
relocate or cease use of the leased asset

□ Punitive tax consequences when an option is exercised (or not exercised) to purchase the
underlying asset, renew the lease term, or terminate the lease prior to the stated expiration date

Depending on the information available, a lessor and a lessee may arrive at different conclusions as to
whether certain options appear reasonably certain to be exercised. Lessors will typically have less
knowledge of lessee-specific factors, which may impact their analysis.

See LG 3.3.2 and LG 3.3.3 for information on economic penalties and purchase, renewal, and
termination options. See LG 3.3.4.4 for information on how guarantees impact the assessment of this
criterion. See ASC 842-10-55-26 for additional examples of economic factors to consider.

3.5 Lessee classification examples

Lessee classification is based on whether a lease is effectively a financed purchase or an arrangement
to obtain usage rights to an asset for a specified period. If one or more of the classification criteria in
ASC 842-10-25-2 are met, the lease should be classified as a finance lease by the lessee. If none of the
criteria are met, the lease should be classified as an operating lease. Example 3-18, Example 3-19,
Example 3-20, Example 3-21, and Example 3-22 illustrate some of the items that lessees will need to
consider when evaluating lease classification.

3.5.1 Finance leases

EXAMPLE 3-18

Lease classification – non-specialized digital imaging equipment lease (lessee)

Lessee Corp enters into a lease of non-specialized digital imaging equipment with Lessor Corp. The
following table summarizes information about the lease and the leased assets.

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