The lessor may classify leases as one of the following:
1. Operating leases.
2. Direct-financing leases.
3. Sales-type leases.
1. Operating leases.
2. Direct-financing leases.
3. Sales-type leases.
Capitalization Criteria (Lessor)
Group I
1. The lease transfers ownership of the property to the lessee.
2. The lease contains a bargain-purchase option.
3. The lease term is equal to 75 percent or more of the estimated economic life of the leased property.
4. The present value of the minimum lease payments (excluding executory costs) equals or exceeds 90 percent of the fair value of the leased property.
Group II
1. Collectibility of the payments required from the lessee is reasonably predictable.
2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease (lessor’s performance is substantially complete or future costs are reasonably predictable).
1. Collectibility of the payments required from the lessee is reasonably predictable.
2. No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease (lessor’s performance is substantially complete or future costs are reasonably predictable).
Two groups of capitalization criteria for the lessor. If at the date of inception, the lessor agrees to a lease that meets one or more of the Group I criteria (1, 2, 3, and 4) and both of the Group II criteria (1 and 2), the lessor shall classify and account for the arrangement as a direct-financing lease or as a sales-type lease.
(Note that the Group I criteria are identical to the criteria that must be met in order for a lessee to classify a lease as a capital lease). Why the Group II requirements? The profession wants to ensure that the lessor has
really transferred the risks and benefits of ownership. If collectibility of payments is not predictable or if performance by the lessor is incomplete, then the criteria for revenue recognition have not been met. The lessor should therefore account for the lease as an operating lease.