This free, guided checker walks your finance team through the key decision points for ASC 842 Lease Classification (Lessee). Answer a few questions to see the likely treatment and the evidence to document.
Answer a few quick questions below. It is private - nothing is submitted or stored - and takes about a minute.
This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
Here is what the checker asks and why each step matters. Prefer to talk it through? Contact us and we will help directly.
Classification tests the substance of the arrangement: meeting any one of the five criteria in ASC 842-10-25-2 makes the lease a finance lease, and you do not need to evaluate the remaining criteria. Start with the title-transfer test, which looks for a clause that passes ownership to the lessee by the end of the lease term. Weigh the executed contract terms rather than the parties' expectations; a lease that transfers ownership only if the lessee exercises a separate option is evaluated under the purchase-option criterion instead.
Ownership transfers to the lessee, so the lease is a finance lease under ASC 842-10-25-2(a).
Official guidance: FASB Accounting Standards Codification
Reasonably certain is a high threshold based on economic incentive at commencement, not merely whether an option exists. Weigh the option price against the asset's expected fair value at the exercise date, together with significant leasehold improvements, relocation or reinstallation costs, and how important the asset is to operations. The common trap is assessing the option with hindsight or using the lessee's general intent rather than the economic compulsion that exists at commencement.
A purchase option the lessee is reasonably certain to exercise makes the lease a finance lease under ASC 842-10-25-2(b).
Official guidance: FASB Accounting Standards Codification
Compare the lease term, including option periods reasonably certain of exercise, with the remaining economic life of the underlying asset. The 75 percent threshold is a practical benchmark carried over from prior guidance, not a bright line in ASC 842. This criterion is not applied when the lease commences at or near the end of the asset's economic life, which the standard generally treats as the final 25 percent of the total economic life.
A lease term covering the major part of the asset's remaining economic life makes the lease a finance lease under ASC 842-10-25-2(c).
Official guidance: FASB Accounting Standards Codification
Compute the present value of the lease payments plus any lessee residual value guarantee, and compare it with the fair value of the underlying asset at commencement. Discount using the rate implicit in the lease if it is readily determinable; otherwise use the lessee's incremental borrowing rate, and a nonpublic lessee may elect a risk-free rate by asset class. The 90 percent threshold is a common practical benchmark for substantially all, not a bright line, and the payments must include only amounts that qualify as lease payments under ASC 842-10-30-5.
A present value equal to or exceeding substantially all of the asset's fair value makes the lease a finance lease under ASC 842-10-25-2(d).
Official guidance: FASB Accounting Standards Codification
This criterion asks whether the asset is so specialized that the lessor could not redeploy it to another user at the end of the term. Consider contractual restrictions and the practical ability to re-lease or sell the asset without significant modification or a significant loss in value. Do not confuse a specialized asset with one that is simply important to the lessee; the test is about the lessor's alternative use, not the lessee's dependence on the asset.
A specialized asset with no alternative use to the lessor makes the lease a finance lease under ASC 842-10-25-2(e). None of the five ASC 842-10-25-2 criteria is met, so the lease is not a finance lease; evaluate whether the short-term lease recognition exemption applies before recognizing an operating lease (ASC 842-20-25-2).
Official guidance: FASB Accounting Standards Codification
The short-term lease exemption is an accounting policy election made by class of underlying asset, not lease by lease. Measure the lease term at commencement, including option periods the lessee is reasonably certain to exercise, and confirm there is no purchase option reasonably certain of exercise. A common trap is treating a month-to-month or evergreen arrangement as short-term without evaluating whether renewals the lessee is reasonably certain to exercise push the term beyond 12 months.
The lease qualifies as a short-term lease and the entity has elected the exemption for this class of underlying asset, so no right-of-use asset or lease liability is recognized (ASC 842-20-25-2). None of the ASC 842-10-25-2 criteria is met and the short-term exemption has not been elected, so the lease is an operating lease recognized on the balance sheet under ASC 842-10-25-3. None of the ASC 842-10-25-2 criteria is met and the short-term exemption is unavailable, so the lease is an operating lease under ASC 842-10-25-3.
Official guidance: FASB Accounting Standards Codification
Send us your situation and one of our senior CPAs will review it with you - fixed fee, no surprises.
Contact Us