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Lease classification

The following table shows the schedule of lease payments.

Date Amount

Year 1 500,000
Year 2 (515,000 – 200,000 lease incentive) 315,000
Year 3 530,450
Year 4 546,364
Year 5 562,754
Year 6 579,637

Year 7 597,026
Year 8 614,937
Year 9 633,385
Year 10 652,387

Total $5,531,940

Lessor Corp should classify the lease as a sales-type lease because at lease commencement, Lessee
Corp is reasonably certain to exercise its fixed-price purchase option at the end of the initial lease term
(i.e., after 10 years). As a result, Lessee Corp has effectively obtained control of the underlying asset,
which is economically similar to Lessor Corp selling the underlying asset to Lessee Corp. Due to the
exercise price of the option, the lease would also result in payments equal to substantially all of the fair
value of the underlying asset.

See Example 4-8 for an illustration of the initial recognition and measurement of this type of lease.

3.6.2 Operating lease

EXAMPLE 3-25
Lease classification – automobile lease (lessor)

Lessor Corp leases an automobile to Lessee Corp. The following table summarizes information about
the lease and the leased asset.

Lease term 3 years, no renewal option

Economic life of the automobile 6 years

Fair value of the automobile $30,000

Lessor Corp’s carrying value of the
automobile $30,000

Purchase option Lessee Corp has the option to purchase the automobile at fair
market value upon expiration of the lease.

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