Lease Accounting
The accounting for the right to use an asset under a contract, classified as finance or operating.
FAR loves to make you classify the lease and then build the expense pattern, because that is where finance and operating diverge. The tell is any of the five ASC 842 finance-lease criteria—transfer of ownership, a reasonably-certain purchase option, term covering the major part of economic life, present value of payments at or above substantially all of fair value, or a specialized asset with no alternative use to the lessor. Meet none and it’s operating. Watch the split: a finance lease reports separate amortization plus interest (front-loaded total), an operating lease a single straight-line lease expense.
The classic trap is thinking operating leases are off-balance-sheet, the pre-842 world some older banks still echo; under current GAAP they aren’t. Don’t confuse the criteria with the old ASC 840 75%/90% bright lines—842 keeps those only as a non-mandatory benchmark for those two judgments. On the lessor side the same five tests apply: meet one and it’s sales-type; meet none but pass a collectibility-probable and a substantially-all PV check, and it’s direct-financing—otherwise operating.
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