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Lease classification

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 57% of the
economic life of the asset economic life of the asset (4-year lease / 7-year
economic life), which is not deemed to be a
major part.

Sum of present value of lease payments and any The variable lease payment should be included
residual value guarantee by the lessee amounts to in fixed lease payments using the Prime rate at
substantially all of the fair value of the underlying lease commencement. The total payments are
asset $6,275.
The present value of the lease payments
(discounted at Lessee Corp’s incremental
borrowing rate of 8%) is $5,595.
Therefore, the present value of the lease
payments amounts to approximately 56% of the
fair value of the leased asset ($5,595 /
$10,000), which is not deemed to be
substantially all of the fair value of the leased
asset.

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

The following table shows the schedule of lease payments.

Date Amount

Year 1 $1,500
Year 2 1,545
Year 3 1,591
Year 4 1,639

Total $6,275

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 4-6 for an illustration of the initial recognition and measurement of this type of lease.

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