Lease Classification (ASC 842)

Walks the five lessee classification criteria under ASC 842. Operating vs. finance lease. Educational demo of an AI-built accountant utility.

Educational demo, not professional accounting advice.Real lease classification requires reading the actual contract, considering specific facts and circumstances, and consulting authoritative literature (ASC 842-10-25-2). Don't rely on this tool for live engagement work.

1. Does the lease transfer ownership of the underlying asset to the lessee by the end of the lease term?

ASC 842-10-25-2(a). A bargain purchase option that the lessee is reasonably certain to exercise also counts.

2. Does the lease grant the lessee a purchase option that the lessee is reasonably certain to exercise?

ASC 842-10-25-2(b). 'Reasonably certain' is a high threshold — meaningful economic incentive for the lessee to exercise.

3. Is the lease term for the major part of the remaining economic life of the underlying asset?

ASC 842-10-25-2(c). Common practical bright line: ≥75% of remaining economic life. Doesn't apply if commencement is at or near the end of the asset's life.

4. Does the present value of lease payments + any residual guaranteed equal substantially all of the fair value of the asset?

ASC 842-10-25-2(d). Common practical bright line: ≥90% of fair value. Use the rate implicit in the lease (or incremental borrowing rate if implicit isn't determinable).

5. Is the asset of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term?

ASC 842-10-25-2(e). Test for specialization. Even commodity-like assets sometimes meet this if heavily customized.

Answer all five criteria for a classification.