Lease classifications

A lease classification refers to the way that a lease is processed from an accounting perspective. A lease classification can be finance or operating. FAS 13 provides a framework for a set of accounting rules that are used to specify whether a lease is a finance or an operating lease. If you are uncertain if your lease is a finance or operating lease, then run the Classification test and automatically specify your lease classification.

These are the types of leases:

• Finance leases

  A finance lease transfers the ownership benefits and risks to the lessee who accounts for the lease as an asset acquisition and liability incurrence. A finance lease is capitalized and depreciated on the books over the shorter of the lease term or the remaining asset life. Payments that are created on a finance lease are accrued towards ownership of an asset. An example of this is an equipment lease with a purchase option.

• Operating leases

  An operating lease is associated with items that are not depreciated. Payments for operating leases are expensed as they are created and do not accrue towards ownership. Examples of operating leases are leases for apartments or office space. You can track operating leases in Asset Accounting, but their book value is zero.