Lease Classification: US GAAP vs. IFRS
Under U.S. GAAP, the classification of leases (e.g., operating, capital)
depends on whether the lease meets certain criteria. ASC 840-10-25-1
indicates that a lessee classifies a lease as a capital lease if it meets one
or more of the following criteria:

"The lease transfers ownership of the property to the lessee by
the end of the lease term."

"The lease contains a bargain purchase option.”

"The lease term [is at least] 75 percent . . . of the estimated
economic life of the leased property. However, if the beginning of
the lease term falls within the last 25 percent of the total
estimated economic life of the leased property, including earlier
years of use, this criterion shall not be used for purposes of
classifying the lease."

"The present value . . . of the minimum lease payments [at lease
inception] excluding . . . executory costs [is at least] 90 percent of
the excess of the fair value of the leased property. If the beginning
of the lease term falls within the last 25 percent of the total
estimated economic life of the leased property, including earlier
years of use, this criterion shall not be used for purposes of
classifying the lease."
If none of these criteria are met, the lease is classified as an operating
lease.
ASC 840-10-25-42 states that a lessor would classify a lease as a salestype, direct financing, or leveraged lease if, in addition to meeting any
of the criteria described above, the lease meets both of the following
conditions:

"Collectability of . . . lease payments is reasonably predictable."

"No important uncertainties [exist regarding] the amount of
unreimbursable costs yet to be incurred."
Under IFRSs, the classification of a lease does not depend on whether
specified criteria are met. Rather, the classification depends on
whether the lease is in substance an operating or finance lease (a
capital lease in U.S.-GAAP-equivalent terminology). To assist in this
determination, paragraphs 10 and 11 of IAS 17 provide the following
examples and indicators that may lead to classification of a lease as a
finance lease:

"The lease transfers ownership of the asset to the lessee by the
end of the lease term."

The lease contains a bargain purchase option.

"The lease term is for the major part of the economic life of the
asset even if title is not transferred."

The present value of the minimum lease payments at lease
inception is for "substantially all of the fair value of the leased
asset."

"The leased assets are of such a specialized nature that only the
lessee can use them without major modifications."

"If the lessee can cancel the lease, the lessor's losses associated
with the cancellation are borne by the lessee."

"Gains or losses from the fluctuation in the fair value of the
residual accrue to the lessee (for example, in the form of a rent
rebate equaling most of the sales proceeds at the end of the
lease)."

"The lessee has the ability to continue the lease for a secondary
period at a rent that is substantially lower than market rent."
However, the above indicators may not always be determinative of a
lease's classification. Paragraph 12 of IAS 17 states, in part:
The examples and indicators in paragraphs 10 and 11 are not always
conclusive. If it is clear from other features that the lease does not
transfer substantially all risks and rewards incidental to ownership, the
lease is classified as an operating lease.