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Lease classification

Standalone Annual lease Allocated lease
price Allocated % payment payment
(A) (A / $550) = (B) (C) (B × C) = D

Annual copier
lease payment $ 475 86.36% $ 500 $ 432

Annual
maintenance
contract fee 75 13.64% 500 68

Total $ 550 100.00% $ 500

Lessee Corp should then 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 The lease does not contain a purchase option.
certain to exercise

Lease term is for the major part of the remaining Lessee Corp is utilizing the asset for 60% of the
economic life of the asset economic life of the asset (3-year lease / 5-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 allocated to the lease component (discounted at
substantially all of the fair value of the underlying Lessee Corp’s incremental borrowing rate of
asset 5.5%) is $1,229.

Therefore, the present value of the lease
payments amounts to approximately 61% of the
fair value of the leased asset ($1,229 / $2,000),
which is not deemed to be substantially all of
the fair value of the leased asset.

Specialized nature The copier 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 4-5 for an illustration of the initial recognition and measurement of this type of lease.

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