Quick Finance Tip - Finance or Operating Lease Under GAAP

Classification in GAAP is “prescriptive”. If one of the following criteria is met, then a lease is then considered to be a Finance Lease, if not, then it will be an Operating Lease. As a reminder, Finance Leases are reported in the Balance Sheet, where Operating Leases are direct expenses in the Income Statement.
 
Finance Lease for Lessee Prescription:

• Ownership of the leased asset transfers to the lessee at the end of the lease
• Bargain Purchase Option for the lessee to purchase the asset cheaply
• Term is 75% of the useful life of the asset
• PV of lease payments is 90 percent more than fair value of asset