Lease classification – Finance or operating lease?

PwC's accounting podcast

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This first episode in a miniseries on lease accounting focuses on lease classification. We provide an overview of the differences between finance and operating leases and discuss the criteria for classifying leases.
In this episode, you’ll hear:

• 3:30 - An overview of the key differences between finance and operating leases, including expense recognition and cash flow classification
• 5:15 - A discussion of how to determine if a lease should be classified as finance or operating including:
  • 6:35 - Lease commencement date considerations
  • 10:20 - Whether a lease contains a single asset or multiple assets
  • 14:41 - Whether the lease term is a major part of the economic life of the asset
  • 22:55 - The lease payment criterion, including a breakdown of lease payments and the appropriate discounting methodology
  • 41:56 - Highlights of other classification criteria such as title transfer, purchase options, and alternative use

For more information, read chapter 3 of our Leases guide. Additionally, follow this podcast on your favorite podcast app for more episodes.
Suzanne Stephani is a director in PwC’s National Office specializing in the statement of cash flows, as well as the application and interpretation of the accounting guidance related to financing and leasing transactions.
Marc Jerusalem is a PwC National Office managing director specializing in leasing. Marc consults with clients on complex lease accounting issues and is a frequent contributor to many related PwC National Office publications.
Heather Horn is the PwC National Office Sustainability & Thought Leader, responsible for developing our communications strategy and conveying firm positions on accounting, financial reporting, and sustainability matters. In addition, she is part of PwC’s global sustainability leadership team, developing interpretive guidance and consulting with companies as they transition from voluntary to mandatory sustainability reporting. She is also the engaging host of PwC’s accounting and reporting weekly podcast and quarterly webcast series.
Transcripts available upon request for individuals who may need a disability-related accommodation. Please send requests to [e-mail].

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1. Lease classification – Finance or operating lease? (00:00:00)

2. An overview of the key differences between finance and operating leases, including expense recognition and cash flow classification (00:03:30)

3. A discussion of how to determine if a lease should be classified as finance or operating including: (00:05:15)

4. Lease commencement date considerations (00:06:35)

5. Whether a lease contains a single asset or multiple assets (00:10:20)

6. Whether the lease term is a major part of the economic life of the asset (00:14:41)

7. The lease payment criterion, including a breakdown of lease payments and the appropriate discounting methodology (00:22:55)

8. Highlights of other classification criteria such as title transfer, purchase options, and alternative use (00:41:56)