Lease classification rules

  • US GAAP

    At commencement date, lessee classifies each separate lease component as finance or operating. These are the characteristics of a finance lease:

    Standard criteria Evaluated fields for classification test
    Ownership of lease is transferred to lessee by the end of the lease term. Select Ownership.
    Lessee has an option to purchase the asset and the lessee is reasonably certain to exercise this option. Select Exercise Purchase.
    Lease term is for the major part of the remaining economic life of the asset. If the commencement date falls at or near the end of the asset’s economic life, you cannot use this criteria to classify the lease. Economic life-to-lease term calculation incurrent release. Review the begin date of lease and if <=25% of the asset’s life remains, skip this criteria in evaluation.
    Fair value of the underlying asset >= 90% (PV lease payments) + (residual value guaranteed by the lessee) Present value to market value calculation in current release.
    The asset is so specialized that it has no use to the lessor at the end of the lease. Select Specialized Asset.

    If the criteria is none of the above, then the lease is an operating lease.

  • IFRS

    All new leases are considered finance leases unless the value of each individual asset is less than or equal to $5,000.

    These criteria requires an exchange rate to determine the equivalent USD value:

    • Operating leases under IFRS are processed similar to short term operating leases under US GAAP.
    • Finance leases under IFRS are processed similar to short term finance leases under US GAAP.