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Lease classification

Analysis

Lessee Corp should assess the lease classification using the criteria outlined in ASC 842-10-25-2 and
ASC 842-10-25-3.

Criteria Analysis

Transfer of ownership Ownership of the asset does not transfer to
Lessee Corp by the end of the lease term.

Purchase option which the lessee is reasonably At lease commencement, it is not reasonably
certain to exercise certain that Lessee Corp will exercise the
purchase option.

Lessee Corp does not have a significant
economic incentive to exercise the purchase
option because the option is at fair value at the
expiration of the lease.

Lease term is for the major part of the remaining Lessee Corp is utilizing the asset for 50% of the
economic life of the asset economic life of the asset (3-year lease / 6-year
economic life), which is not deemed to be a
major part.

Sum of present value of lease payments and any The present value of the lease payments
residual value guarantee by the lessee amounts to (discounted at Lessee Corp’s incremental
substantially all of the fair value of the underlying borrowing rate of 6% because the rate charged
asset in the lease is not readily determinable) is
$16,518.
Therefore, the present value of the lease
payments amounts to approximately 55% of the
fair value of the leased asset ($16,518 /
$30,000), which is not deemed to be
substantially all of the fair value of the leased
asset.

Specialized nature The automobile is non-specialized and could be
used by another party without major
modifications.

Lessee Corp should classify the lease as an operating lease because none of the criteria in ASC 842-10-
25-2 and ASC 842-10-25-3 have been met.

See Example 4-4 for an illustration of the initial recognition and measurement of this type of lease.

EXAMPLE 3-21

Lease classification – copier with lease and nonlease components (lessee)

Lessee Corp leases a copier from Lessor Corp. The following table summarizes information about the
lease and the leased asset.

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