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finance lease

Under FASB and IASB guidance, .a lease classified as a finance lease requires the lessee to include lease assets and leases liabilities on the balance sheet.

Both operating and finance leases must report amortization on a right-of-use asset. Finance lease must also report an interest expense. Finance leases are reported similarly to the payment schedule of a loan

A lease is a finance lease if it represents an installment purchase by the lessee, and if any of the following conditions exist at lease commencement:

• The Total Lease Payment exceeds 90% of Fair Market Value.
• The Lease Term exceeds 75% of asset’s remaining useful life. However, this criterion doesn’t need to be considered if the lease commencement date falls at or near the end of the economic life of the underlying asset. Thus, if Building Age exceeds or is near end of Building Status Life; then the system set the Ratio Lease Term Over Remaining Economic Life value to 0.00.
• The lease provides the lessee an option to purchase the underlying asset, and that option is reasonably certain to be exercised.
• The lease transfers the ownership of the underlying asset to the lessee by the end of the lease term.
• The underlying asset is of such a specialized nature that only the lessee can use it without major modifications.

FASB ASC 842 and IASB call for the following to be capitalized in a finance lease. This generally includes base rent plus any fixed increases during the initial and “reasonably certain” renewal terms.

• your minimum fixed rent payments after free rent, plus any increases in your rent.

• real estate tax amount included in the base rent (gross lease only)

The following expenses do not need to be capitalized for a finance lease:

• CAM
• operating costs
• utility cost
• services
• real estate taxes (net leases only)

Under FASB ASC 842, the terminology has changed from "capital lease" to "finance lease."

See also:

• operating lease

• FASB ASC 842

• IASB IFRS 16