Posted by TJ on Friday April 24, 2009 @ 01:08 PM
[Tags: accounting, guide, business]

Below is outline of the tests used to determine whether a lease should be accounted for as a Capital Lease or an Operating Lease for GAAP Accounting.

A lease should be treated as an capital lease if it meets any one of the following four conditions -
(a) If the lease life exceeds 75% of the life of the asset
(b) if there is a transfer of ownership to the lessee at the end of the lease term
(c) if there is an option to purchase the asset at a "bargain price" at the end of the lease term.
(d) if the present value of the lease payments, discounted at an appropriate discount rate, exceeds 90% of the fair market value of the asset.

Source: FASB Statement No. 13 - Accounting for Leases
(as replaced by Codification Topic 840 Leases)