From the course: Accounting Foundations: Leases
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Implementation of the FASB four criteria
From the course: Accounting Foundations: Leases
Implementation of the FASB four criteria
- In 1976 the Financial Accounting Standards Board, or FASB, developed four famous, or maybe infamous, lease classification criteria. Automatic ownership transfer at the end of the lease. Bargain purchase option at the end of the lease. The lease covers 75% or more of the life of the leased asset. And the value of the lease payments covers 90% or more of the cash price of the leased asset. If the terms of the lease satisfy any one of these four criteria, then the leased asset and the associated obligation to make the lease payments are reported in the balance sheet of user company. Now in this discussion, user company is the company using the asset and making the payments. The label for this kind of lease is a capital lease. Now note the capital lease label is the original label from 1976. These days we call this kind of lease a finance lease. Capital lease and finance lease are two different labels for the same thing. With a capital finance lease, even though…
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