What will be an ideal response?
Answer: Under GAAP, there are two groups of criteria for classifying leases as capital leases from the point of view of the lessor:
Group I—Any one of the four criteria for a lessee must be met:
1. Title must transfer to the lessee at the end of the lease.
2. The lease contains a bargain purchase option.
3. The lease term must be equal to 75% or greater to the economic life of the property.
4. The present value of the minimum lease payments must be equal to 90% or greater of the fair market value of the property at the inception of the lease.
Group II—Both of the following criteria must be met:
1. Collectability of minimum lease payments from the lessee is reasonably assured.
2. No important uncertainties exist regarding the amount of future non reimburseable costs to be incurred by the lessor under the terms of the lease.
If both of the Group II criteria are not met, the lessor must treat the lease as an operating lease even if the lessee treats it as a capital lease.