The Financial Accounting Standards Board (FASB), under FASB 13 first issued in 1976, created guidelines for whether a lease constitutes a capital lease or an operating lease from a lessee’s and a lessors accounting perspective. This determination is different from whether or not a lease is a true lease for federal tex purposes.
From the lessee’s perspective only, if a lease meets or satisfies any of the following four criteria, the lessee must treat the lease as a capital lease and record the equipment on its financial statements as an asset and its payment obligations as a liability. If the lease does not meet or satisfy any of these accounting tests, the lessee may qualify its transaction as an operating lease.
The basic criteria for a capital lease appear in paragraph 7 of FASB 13. A lease constitutes a capital lease if the lease meets any one of these four criteria:
- Automatically transfer ownership of the leased property to the lessee at the end of the lease term.
- Contains an option that allows the lessee to purchase the leased property at a bargain price.
- Has a term that equals or exceeds 75 percent of the estimated economics life of the leased property.
- Requires rental or other minimum lease payments that, on a present value basis, equal or exceed 90 percent of the fair value of the leased property.
From the lessors perspective, if at inception a lease meets any of the four criteria, and in addition meets both of the following criteria, it will be classified as a capital lease. Otherwise, it will be classified as an operating lease.
- Collectibility of the minimum lease payments is reasonably predictable.
- No important uncertainties surround the amount of reimbursable costs yet to be incurred by the lessor under the lease.