A lessee should classify a lease transaction as a capital lease if it is non-cancelable and met one or more of the four classification criteria:
· Title/legal ownership of the asset passes to the lessee at the end of the lease
· The lessee has a bargain purchase option.
· The non-cancelable lease term is equal to or greater than 75% of the remaining life of the asset.
· The present value of the minimum lease payments is equal to or greater than 90% of the fair value of the asset, by using the lower of lessee’s incremental borrowing rate or implicit interest rate. The implicit interest rate is the discount rate that make PV equal to fair market value.
If none of these criteria are met, the lease can be classified as an operating lease.
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