Criteria for Determining Finance vs. Operating Leases
If any of the following criteria/thresholds are met with a “Yes”, the lease will be classified as a Finance Lease. If all items are for the specific lease are “No”, the lease may be classified as an Operating Lease.
- Transfer of Ownership: Ownership of the asset will be transferred from Lessor to Lessee before expiration of the lease
- Specialized Asset: Aspect or feature of an asset (such as a specialized machine) that makes it useful for one or few specific purposes and which, therefore, cannot easily be sold off quickly in a fire-sale
- Lease Term: The lease term is greater than or equal to the chosen threshold (typically 90%) of the useful life of the asset
- Purchase Option: The purchase option of the lease is reasonably certain to be exercised
- Lease Payments: The present value of minimum lease payments is greater than or equal to (typically 75%) of the fair value of the asset
During Lease Administration Business Unit setup there is an option to ‘Report All Assets as Finance under IFRS’. By selecting this box, leases will be classified as Finance leases regardless of the lease input criteria discussed above, in order to meet IFRS standards.
Based on the criteria mentioned above, the PeopleSoft Lease Administration module will automatically classify the lease as Finance or Operating. This classification can be overridden by users before activating the lease in the system.
For further information on Elire’s PeopleSoft services including Lease Administration & Asset Management, visit our service area page to learn more.
Real Estate is estimated to be the 2nd largest expense in any organization, with facilities and real estate departments historically operating in a silo separate from Corporate Accounting. The upcoming change to Lease Accounting Standards will affect nearly all customers worldwide, including all property and equipment leases. All of these leases, including existing, need to be reassessed and recognized as leased assets on the balance sheet – significantly impacting financial reporting. Are you ready for the upcoming changes?