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Lease classification

dates because the terms and conditions within the agreement apply to different underlying assets that
are made available for use by the lessee on different dates.

3.3 Lease classification criteria

Lease classification is governed by five criteria. Although the guidance considers whether a lease is
economically similar to the purchase of a nonfinancial asset from the perspective of control, rather
than on the basis of risks and rewards of ownership (as used in ASC 840), the classification approach
is substantially similar to previous guidance. If any of the five criteria in ASC 842-10-25-2 are met, a
lessee should classify the lease as a finance lease and the lessor would classify the lease as a sales-type
lease. If none of the criteria are met, a lessor would classify a lease as a direct financing lease if the
criteria in ASC 842-10-ASC 842-10-25-3 are met. All other leases should be classified as an operating
lease by both the lessee and lessor.

Although lessors are subject to the same classification criteria as lessees, additional considerations
relevant to any revenue generating activity – such as the collectibility of amounts due under the lease
– may impact the timing and recognition of selling profit or loss, or income over the lease term.

A reporting entity that elects the exception for short-term leases would not apply the lease
classification criteria. See LG 2.2.1 for information on the short-term lease measurement and
recognition exemption.

Figure 3-3 provides the lease classification criteria contained in ASC 842-10-25-2 and
ASC 842-10-25-3.

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