How to Avoid Lease Asset Capitalization
Leases are a common occurrence in businesses. A company can leverage the lease process by not purchasing an asset and dealing with any extra costs that come with ownership. Accounting principles have strict guidelines on lease classification. The two classification types are operating and capital. In order to avoid lease asset capitalization, a company must structure the lease agreement to prevent specific items from occurring during the lease period. Generally accepted accounting principles (GAAP) provide the guidelines for lease classification.
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Instructions
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Avoid inclusion of a non-cancelable clause for the lease term. This clause, plus the inclusion of one of the following statements, will result in lease asset capitalization.
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Ensure the lease agreement does not transfer ownership. Ownership transfer requires lease asset capitalization.
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Prevent an agreement that allows for a bargain purchase option. Leases that allow for the transfer of ownership at lease end is a capital lease characteristic.
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Review the non-cancelable clause if one is in the agreement. A non-cancelable lease term that is equal to or greater than 75 percent of the asset's economic life will require lease asset capitalization.
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Conduct a present value analysis for the asset in the lease agreement. Minimum lease payments that are equal to or greater than 90 percent of the asset's fair value results in a capital lease.
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Tips & Warnings
A public accountant can help review any lease agreements and ensure the stated agreement results in an operating lease.
