Lease Accounting 22.2 LO2 Financial leases are essentially treated as debt financing Present value of lease payments must be included on the statement.

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Lease Accounting 22.2 LO2 Financial leases are essentially treated as debt financing Present value of lease payments must be included on the statement of financial position as a liability Same amount shown on the left side of the statement of financial position Operating leases are still “off-balance-sheet” and do not have any impact on the statement of financial position itself

Criteria for a Capital Lease LO2 If one of the following criteria is met, then the lease is considered a capital lease and must be shown on the statement of financial position Lease transfers ownership by the end of the lease term Lessee can purchase asset at below market price Lease term is for 75 percent or more of the life of the asset Present value of lease payments is at least 90 percent of the fair market value at the start of the lease

Taxes 22.3 LO2 Lessee can deduct lease payments for income tax purposes under specific circumstances Lease must be primarily for business purposes and not just to avoid taxes Does not apply to conditional sales agreements Lessee cannot automatically acquire title of the property after payment of a specified amount in the form of rentals Lessee cannot be required to buy the property during or at the termination of the lease Lessee cannot have the right during or at the expiration of the lease to acquire the property at a price less than fair market value