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ConceptsCoach, Certified Public Accountant (CPA)
Category: Finance
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Experience:  Chartered Accountant and MBA
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What are the criteria for classifying a lease as operating

Resolved Question:

What are the criteria for classifying a lease as operating or capital and why is there a difference between the two? What are the implications of an operating lease versus a capital lease on an entity’s financial statements?
Submitted: 5 years ago.
Category: Finance
Expert:  ConceptsCoach replied 5 years ago.

Two types of lease accounting method:

Capital Lease

Operating lease

Leases that meet any of the following criteria is a capital lease:

1. Leases which transfers substantial ownership and risk to the lessee.

2. Leases with a bargain purchase options

3. Leases with tenure equal to 75% or more of the useful economic life of the leased assets.

4. Leases in which the present value of minimum lease payments is equal to 90% or more of the fair market value at the inception of the lease.

Any other lease is operating lease.

Operating lease are treated as an expense and appears in the Income Statement while Capital lease is treated as an Asset and Liability in the Balance Sheet

Hope this helps

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