| Ownership: |
Ownership of the asset might be transferred to the lessee at the end of the lease term. |
The lease term. Ownership is retained by the lessor during and after the lease term. |
| Bargain Purchase Option: |
Option: The lease contains a bargain purchase option to buy the equipment at less than fair market value. |
Less than fair market value. The lease cannot contain a bargain purchase option. |
| Term: |
The lease term equals or exceeds 75% of the asset's estimated useful life. |
The lease term is less than 75 percent of the estimated economic life of the equipment. |
| Present Value: |
The present value of the lease payments equals or exceeds 90% of the total original cost of the equipment. |
The present value of lease payments is less than 90 percent of the equipment's fair market value. |
| Risks and Benefits: |
Transferred to lessee. Lessee pays maintenance, insurance and taxes. |
Right to use only. Risk and benefits remain with lessor. Lessee pays maintenance costs. |
| Accounting: |
Lease is considered as asset (leased asset) and liability (lease payments). Payments are shown in Balance sheet. |
No risk of ownership. Payments are considered as operating expenses and shown in Profit and Loss statement. |
| Tax: |
Lessee is considered to be the owner of the equipment and therefore claims depreciation expense and interest expense. |
Lessee is considered to be renting the equipment and therefore the lease payment is considered to be a rental expense. |
