Accounting for leases

Differences exist between the financial and tax accounting requirements for leases. These differences usually result when leases are classified as either rental or sales agreements. For the lessee, a capital or sales lease must meet one of 4 criteria: 1. ownership of the property transfers to the lessee at the end of the term, 2. a bargain purchase option is present, 3. the lease term is equal to 75% or more of the estimated economic life of the property, or 4. the present value of the minimum lease payment is at least 90% of the fair value of the property. Leases are classified by lessors as sales type leases, direct financing leases, or operating leases. Under a direct-financing lease, a receivable is recorded at the present value of the future minimum lease payments. Federal tax requirements differ from financial reporting for leases. Each lease agreement should be evaluated in terms of the specifics of the agreements, the intent of the parties, and the criteria set forth by Financial Accounting Standards Board (FASB) Statement no. 13 and Internal Revenue Service (IRS) requirements.