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Lease classification

3.6 Lessor classification examples

A lessor should determine lease classification based on whether the lease effectively represents a
financing or a sale, as opposed to simply conveying usage rights, by determining whether the lease
transfers substantially all of the risks and rewards of ownership of the underlying asset. Generally, this
approach yields a conclusion that is consistent with existing US GAAP for direct financing leases,
sales-type leases, and operating leases.

At lease commencement, a lessor should not recognize selling profit and revenue if the lease does not
also transfer control of the underlying asset to the lessee. While this represents a change from existing
US GAAP, it aligns with the concept of what constitutes a sale in the new revenue recognition
standard.

Example 3-23, Example 3-24, and Example 3-25 illustrate some of the items that lessors will need to
consider when classifying leases.

3.6.1 Sales-type lease
EXAMPLE 3-23

Lease classification – non-specialized digital imaging equipment lease (lessor)

Lessor Corp enters into a lease of non-specialized digital imaging equipment with Lessee Corp. The
following table summarizes information about the lease and the leased assets.

Lease term 5 years, no renewal option

Economic life of the equipment 6 years

Purchase option None

Annual lease payments $1,100

Payment date Annually on January 1

Fair value of the leased equipment $5,000

Lessor Corp’s carrying value of the
leased equipment $4,500
Rate implicit in the lease 7.04%

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