GlossaryGuide

A lease is an agreement that transfers the right to use an asset for a specified period of time. Follow the standards set forth in FASB Statement No. 13, “Accounting for Leases” to distinguish a financing lease from an operating lease. In particular, if any one of the following criteria is met, a lease must be accounted for as a financing (or capital) lease:

• Ownership of the property is transferred to the lessee at the end of the lease term, or
• The lease contains a bargain purchase option, or
• The lease term represents at least 75 percent of the estimated economic life of the leased property, or
• The present value of the minimum lease payments at the beginning of the lease term is 90 percent or more of the fair value of the leased property to the lessor at the inception of the lease less any related investment tax credit retained by and expected to be realized by the lessor.

If none of the above criteria is met, the lease should be accounted for as an operating lease.