Lease Classification

Concept

What Changed with ASC 842

Virtually ALL leases now go on the balance sheet. Lessees recognize a right-of-use asset and lease liability for both finance and operating leases. Only short-term leases (12 months or less) are exempt.

Key Point

Finance Lease Criteria

A lease is finance if ANY: ownership transfers, bargain purchase option, term is major part of economic life (≥75%), PV of payments is substantially all of fair value (≥90%), or asset has no alternative use.

Concept

Short-Term Exemption

Leases of 12 months or less with no purchase option can bypass balance sheet recognition. Simply expense payments straight-line.

Lessee Accounting

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Practice Questions