1. 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

2. 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

3. 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