Lease- a contract is, or contains, a lease if it conveys the right to control the use of an identified

asset for a period of time in exchange for consideration.

Right to control the use of an asset
1. Obtain substantially all the economic benefits from the use the identified asset
2. Direct the use of the identified asset

Operating vs. finance lease

Operating lease- does not transfer substantially all the risks and rewards of ownership of an
underlying asset
 Owner= lessor
 Rent transaction

Finance lease- transfers substantially all the risks and rewards of ownership of an underlying
asset.
 Form= Rent, however, Substance= Sale transaction
 Lease payments= installment payments

When it is finance lease? (TOMS)

1. Transfer of ownership
 At the end of lease term
2. Option to purchase the asset
 Lessee has the option to purchase the asset at a price sufficiently lower than the
fair value at the date the option is exercisable.
 At the inception it must be reasonably certain that the option will be exercised.

3. Material lease term

 Lease term= major life of the asset= at least 75% of useful life
4. Substantial Present Value of lease payments
 Substantial= present value of all Lease payments is at least 90% fair value of the
asset.