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Lease classification

Criteria Analysis
substantially all of the fair value of the underlying Therefore, the present value of the lease
asset payments amounts to approximately 97% of the
fair value of the leased asset ($4,825 / $5,000),
which is substantially all of the fair value of the
leased asset.

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

Lessee Corp should classify the lease as a finance lease because the lease term is for the major part of
the economic life of the equipment and the present value of the lease payments amounts to
substantially all of the fair value of the underlying asset.

See Example 4-2 for an illustration of the initial recognition and measurement of this type of lease.

EXAMPLE 3-19
Lease classification – real estate lease with a purchase option (lessee)

Lessee Corp enters into a property (land and building) lease with Lessor Corp. The following table
summarizes information about the lease and the leased asset.

Lease term 10 years

Renewal option Five 5-year renewal options
If exercised, the annual lease payments are reset to then
current market rents.

Economic life of the property 40 years

Fair value of the leased property $5,000,000

Purchase option Lessee Corp has an option to purchase the property at the
end of the lease term for $3,000,000.

Annual lease payments The first annual lease payment is $500,000, with increases of
3% per year thereafter.

Payment date Annually on January 1

Incentive Lessor Corp gives Lessee Corp a $200,000 incentive for
entering into the lease (payable at the beginning of year 2),
which is to be used for normal tenant improvements.

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