Lease Standards

Capital vs. Operating Lease Classify Definition

Accounting Standards Codification (ASC) 840

(The lease is considered capital lease if one of the following term is satisfied. Otherwise, it is an operating lease.)

1. Transfer of ownership to the lessee at the end of lease.

2. Bargain-Purchase option allows the lessee to purchase the property at lower than market value.

3. Lease period is equal or exceed 75% of the economic life.

4. Recovery of investment classifies as the present value of the minimum lease payments equal or more than 90%.

International Accounting Standard (IAS) 17

(The lease is considered finance lease, similar to capital lease, if the following condition is met.)

The accounting standard is based on principle instead of specific criteria. The principles indicate whether the less or transfer substantially all of the economic benefit and risk to lessee.