Transfer of Ownership Test

If the lease transfers ownership of the asset to the lessee, the lessor classifies the lease as a finance
lease. This test is not controversial and easily implemented in practice.

Purchase Option Test

As indicated earlier, a purchase option test is met if it is reasonably certain that the lessee will exercise
the option. In other words, the lease-purchase option allows the lessee to purchase the property for a
price that is significantly lower than the underlying asset's expected fair value at the date the option
becomes exercisable (a bargain purchase option). That is, the lessor transfers control (ownership) ofthe
asset to the lessee.

Lease Term Test

When the lease term is a major part of the remaining economic life of the leased asset, lessors should
use the finance method in accounting for the lease transaction. if the lease term is 75 percent or greater
of the economic life of the leased asset, the lease meets the lease term test, and finance lease
treatment is appropriate (often referred to as the 75 percent test

Present Value Test

If the present value of the lease payments is reasonably close to the fair value of the asset, the lessor is
effectively transferring control (ownership) of the asset to the lessee. if the present value of the lease
payments equals or exceeds 90 percent of the fair value of the asset, then a lessor should use the
finance method to record the lease.

Alternative Use Test

If at the end of the lease term, the lessor does not have an alternative use for the asset, it is assumed
that the lessor has transferred control (ownership) of the asset to the lessee. Therefore, the lessor uses
the finance lease method. For example, an equipment manufacturer might build hydraulic lifts to meet
the unique loading dock configurations of a lessee, like Amazon.com (USA). Given the specialty nature of
the equipment, only Amazon can use the lifts and it receives substantially all of the benefits of the
leased asset, such that the alternative use test is met for the lessor