# Is my equipment lease just a monthly rent expense, or is it really a purchase I need to put on the balance sheet?

- **[United States · Lessees applying Topic 842 · US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02)]** When none of the criteria in paragraph 842-10-25-2 are met, a lessee must classify the lease as an operating lease. → [CG-MCE-079#S09](#s-CG-MCE-079-S09)
- **[United States · Lessees with operating leases under Topic 842 · US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02)]** For an operating lease, after the commencement date a lessee must recognise in profit or loss (unless the costs are included in the carrying amount of another asset under other Topics) a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis unless another systematic and rational basis is more representative (or the right-of-use asset has been impaired), variable lease payments not included in the lease liability in the period the obligation is incurred, and any impairment of the right-of-use asset. → [CG-MCE-079#S31](#s-CG-MCE-079-S31)
- **[United States · Lessees applying Topic 842 · US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02)]** As an accounting policy a lessee may elect not to apply the recognition requirements of Subtopic 842-20 to short-term leases and may instead recognise the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period the obligation is incurred; the election must be made by class of underlying asset to which the right of use relates. → [CG-MCE-079#S22](#s-CG-MCE-079-S22)
- **[United States (federal income tax; Internal Revenue Service guidance) · Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business) · U.S. federal income tax]** A taxpayer who acquires equipment for use in a trade or business must first determine whether the agreement is a lease or a conditional sales contract. → [CG-MCE-079#S01](#s-CG-MCE-079-S01)

## What this page establishes

- First test: is it a rental, or a purchase spread over time? — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.)
- Which rulebook you are on, and whether it goes on your balance sheet — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- Your books and your tax return can land in different places — Not established
- What each treatment puts in your books — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation.)
- When the arrangement ends: return, buy, or renew — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- Fixing an arrangement recorded the wrong way in earlier periods — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government.)
- The terms decide it, not the word on the agreement — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government.)
- The criteria that decide it, and what in the agreement shows each one — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government.)
- Your reporting framework, balance-sheet recognition, and the relief for a small private business — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- Rent deduction versus purchase for tax, and keeping the two sets of figures straight — Not established
- The accounts, the periodic charge, and the balance-sheet items each route creates — Established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation.)
- What to pull out of the agreement before you post anything — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- What to post on return of the equipment, exercise of a purchase option, or renewal — Partly established (Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference.)
- Correcting a misclassified arrangement and what must be restated or disclosed — Not established (Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government.)

## First test: is it a rental, or a purchase spread over time?
<a id="need-CG-MCE-079-C1"></a>

- <a id="s-CG-MCE-079-S01"></a>A taxpayer who acquires equipment for use in a trade or business must first determine whether the agreement is a lease or a conditional sales contract. _(jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax)_ `CG-MCE-079#S01`
  > “You must first determine whether your agreement is a lease or a conditional sales contract.” — [Internal Revenue Service, U.S. Department of the Treasury — Income & Expenses 7 (Frequently Asked Questions) - equipment lease payments versus conditional sales contract](https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-7), 2026-09-05; Answer, first paragraph (page "Income & Expenses 7", Frequently asked questions). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S02"></a>Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, read in light of the facts and circumstances existing when the agreement was entered into. _(jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax)_ `CG-MCE-079#S02`
  > “Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, which is read in light of the facts and circumstances when it was entered into.” — [Internal Revenue Service, U.S. Department of the Treasury — Income & Expenses 7 (Frequently Asked Questions) - equipment lease payments versus conditional sales contract](https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-7), 2026-09-05; Answer, second paragraph, first sentence. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S03"></a>A contract is or contains a lease if it conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration, and that period of time may be described in terms of the amount of use of the identified asset. _(jurisdiction: United States, entity_scope: Entities applying Topic 842 to contracts involving property, plant or equipment, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S03`
  > “842-10-15-3 A contract is or contains a lease if the contract conveys the right to
control the use of identified property, plant, or equipment (an identified asset) for
a period of time in exchange for consideration. A period of time may be described
in terms of the amount of use of an identified asset (for example, the number of
production units that an item of equipment will be used to produce).” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, “Identifying a Lease”, paragraph 842-10-15-3. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S04"></a>One of the finance-lease/sales-type classification criteria is that the lease transfers ownership of the underlying asset to the lessee by the end of the lease term. _(jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S04`
  > “The lease transfers ownership of the underlying asset to the lessee by
the end of the lease term.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, paragraph 842-10-25-2(a) (transfer-of-ownership criterion). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S05"></a>One of the finance-lease/sales-type classification criteria is that the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. _(jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S05`
  > “The lease grants the lessee an option to purchase the underlying asset
that the lessee is reasonably certain to exercise.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, paragraph 842-10-25-2(b) (purchase-option criterion). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S06"></a>One of the finance-lease/sales-type classification criteria is that the lease term is for the major part of the remaining economic life of the underlying asset; however, where the commencement date falls at or near the end of the underlying asset's economic life this criterion must not be used for classifying the lease. _(jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S06`
  > “The lease term is for the major part of the remaining economic life of the
underlying asset. However, if the commencement date falls at or near the
end of the economic life of the underlying asset, this criterion shall not be
used for purposes of classifying the lease.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, paragraph 842-10-25-2(c) (economic-life criterion). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S07"></a>One of the finance-lease/sales-type classification criteria is that the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. _(jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S07`
  > “The present value of the sum of the lease payments and any residual
value guaranteed by the lessee that is not already reflected in the lease
payments in accordance with paragraph 842-10-30-5(f) equals or
exceeds substantially all of the fair value of the underlying asset.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, paragraph 842-10-25-2(d) (present-value criterion). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S08"></a>One of the finance-lease/sales-type classification criteria is that the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. _(jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S08`
  > “The underlying asset is of such a specialized nature that it is expected to
have no alternative use to the lessor at the end of the lease term.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, paragraph 842-10-25-2(e) (specialised-asset criterion). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S09"></a>When none of the criteria in paragraph 842-10-25-2 are met, a lessee must classify the lease as an operating lease. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S09`
  > “842-10-25-3 When none of the criteria in paragraph 842-10-25-2 are met:
a.
b.

A lessee shall classify the lease as an operating lease.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Recognition > Lease Classification, paragraph 842-10-25-3(a). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S10"></a>The Update describes one reasonable approach to assessing the economic-life and present-value criteria, under which seventy-five percent or more of the remaining economic life would be a major part of that life, a commencement date within the last 25 percent of total economic life would be at or near the end of economic life, and ninety percent or more of fair value would amount to substantially all of fair value; it is presented as one reasonable approach rather than as a required bright line. _(jurisdiction: United States, entity_scope: Entities applying the classification criteria in Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S10`
  > “842-10-55-2 When determining lease classification, one reasonable approach to
assessing the criteria in paragraphs 842-10-25-2(c) through (d) and 842-10-253(b)(1) would be to conclude:
a.
b.
c.

Seventy-five percent or more of the remaining economic life of the
underlying asset is a major part of the remaining economic life of that
underlying asset.
A commencement date that falls at or near the end of the economic life
of the underlying asset refers to a commencement date that falls within
the last 25 percent of the total economic life of the underlying asset.
Ninety percent or more of the fair value of the underlying asset amounts
to substantially all the fair value of the underlying asset.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Implementation Guidance > Lease Classification, paragraph 842-10-55-2. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S11"></a>The transfer-of-ownership criterion is met in leases that provide that, upon the lessee's performance in accordance with the lease terms, the lessor should execute and deliver to the lessee such documents (including, if applicable, a bill of sale) as may be required to release the underlying asset from the lease and transfer ownership to the lessee. _(jurisdiction: United States, entity_scope: Entities applying the classification criteria in Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S11`
  > “842-10-55-4 The criterion in paragraph 842-10-25-2(a) is met in leases that
provide, upon the lessee’s performance in accordance with the terms of the lease,
that the lessor should execute and deliver to the lessee such documents
(including, if applicable, a bill of sale) as may be required to release the underlying
asset from the lease and to transfer ownership to the lessee.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Implementation Guidance > Transfer-of-Ownership Criterion, paragraph 842-10-55-4. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S12"></a>A lease provision under which ownership of the underlying asset is not transferred if the lessee elects not to pay a specified fee (whether nominal or otherwise) to complete the transfer is an option to purchase the underlying asset and does not satisfy the transfer-of-ownership criterion. _(jurisdiction: United States, entity_scope: Entities applying the classification criteria in Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S12`
  > “842-10-55-6 A provision in a lease that ownership of the underlying asset is not
transferred to the lessee if the lessee elects not to pay the specified fee (whether
nominal or otherwise) to complete the transfer is an option to purchase the
underlying asset. Such a provision does not satisfy the transfer-of-ownership
criterion in paragraph 842-10-25-2(a).” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Implementation Guidance > Transfer-of-Ownership Criterion, paragraph 842-10-55-6. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S13"></a>An entity must determine the lease term as the noncancellable period of the lease together with periods covered by a lessee extension option the lessee is reasonably certain to exercise, periods covered by a termination option the lessee is reasonably certain not to exercise, and periods covered by an option to extend or not to terminate whose exercise is controlled by the lessor. _(jurisdiction: United States, entity_scope: Entities applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S13`
  > “842-10-30-1 An entity shall determine the lease term as the noncancellable period
of the lease, together with all of the following:
a.
b.
c.

Periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option
Periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option
Periods covered by an option to extend (or not to terminate) the lease in
which exercise of the option is controlled by the lessor.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Initial Measurement > Lease Term and Purchase Options, paragraph 842-10-30-1. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S14"></a>At the commencement date an entity assesses whether the lessee is reasonably certain to exercise or not exercise an option by considering all relevant economic factors (contract-based, asset-based, market-based and entity-based), which are interrelated and often require combined consideration; the paragraph gives a non-exhaustive list of example factors including the contractual terms for optional periods compared with current market rates, significant leasehold improvements expected to have significant economic value when the option becomes exercisable, costs of terminating the lease and signing a new one, and the importance of the underlying asset to the lessee's operations. _(jurisdiction: United States, entity_scope: Entities applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S14`
  > “842-10-55-26 At the commencement date, an entity assesses whether the
lessee is reasonably certain to exercise or not to exercise an option by considering
all economic factors relevant to that assessment—contract-based, asset-based,
market-based, and entity-based factors. An entity’s assessment often will require
the consideration of a combination of those factors because they are interrelated.
Examples of economic factors to consider include, but are not limited to, any of the
following:
a.

b.
c.

d.

Contractual terms and conditions for the optional periods compared with
current market rates, such as:
1. The amount of lease payments in any optional period
2. The amount of any variable lease payments or other contingent
payments, such as payments under termination penalties and
residual value guarantees
3. The terms and conditions of any options that are exercisable after
initial optional periods (for example, the terms and conditions of a
purchase option that is exercisable at the end of an extension period
at a rate that is currently below market rates).
Significant leasehold improvements that are expected to have significant
economic value for the lessee when the option to extend or terminate the
lease or to purchase the underlying asset becomes exercisable.
Costs relating to the termination of the lease and the signing of a new
lease, such as negotiation costs, relocation costs, costs of identifying
another underlying asset suitable for the lessee’s operations, or costs
associated with returning the underlying asset in a contractually specified
condition or to a contractually specified location.
The importance of that underlying asset to the lessee’s operations,
considering, for example, whether the underlying asset is a specialized
asset and the location of the underlying asset.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Implementation Guidance > Reasonably Certain, paragraph 842-10-55-26. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S16"></a>The taxpayer's getting title to the property upon payment of a stated amount of "rental" payments required under the agreement is one of the conditions the IRS lists as a condition under which an agreement may, in general, be considered a conditional sales contract rather than a lease. _(jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax)_ `CG-MCE-079#S16`
  > “You get title to the property upon the payment of a stated amount of "rental" payments required under the agreement.” — [Internal Revenue Service, U.S. Department of the Treasury — Income & Expenses 7 (Frequently Asked Questions) - equipment lease payments versus conditional sales contract](https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-7), 2026-09-05; Answer, bulleted list of conditions following "However, in general, you may consider an agreement as a conditional sales contract (Rev. Rul. 55-540, 1955-2 C.B. 39) rather than a lease if one or more of the following conditions apply:", item 2. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S17"></a>Having an option to buy the property at a nominal price compared to the value of the property at the time the option may be exercised — that value being determined when the agreement is entered into — is one of the conditions the IRS lists as a condition under which an agreement may, in general, be considered a conditional sales contract rather than a lease. _(jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax)_ `CG-MCE-079#S17`
  > “You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you enter into the agreement.” — [Internal Revenue Service, U.S. Department of the Treasury — Income & Expenses 7 (Frequently Asked Questions) - equipment lease payments versus conditional sales contract](https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-7), 2026-09-05; Answer, bulleted list of conditions following "However, in general, you may consider an agreement as a conditional sales contract (Rev. Rul. 55-540, 1955-2 C.B. 39) rather than a lease if one or more of the following conditions apply:", item 5. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Partly established. Established: the criteria that determine whether an equipment or vehicle arrangement is a rental or an acquisition financed over time (S02). Missing: what in an agreement evidences each criterion; that the classification rests on the substance of those terms rather than on the label the agreement or the vendor applies to the arrangement._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government._

## The terms decide it, not the word on the agreement
<a id="need-CG-MCE-079-P1"></a>

- See above: A taxpayer who acquires equipment for use in a trade or business must first determine whether the agreement is a lease or a conditional sales contract. ([CG-MCE-079#S01](#s-CG-MCE-079-S01))

- See above: Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, read in light of the facts and circumstances existing when the agreement was entered into. ([CG-MCE-079#S02](#s-CG-MCE-079-S02))

- See above: A lease provision under which ownership of the underlying asset is not transferred if the lessee elects not to pay a specified fee (whether nominal or otherwise) to complete the transfer is an option to purchase the underlying asset and does not satisfy the transfer-of-ownership criterion. ([CG-MCE-079#S12](#s-CG-MCE-079-S12))

- <a id="s-CG-MCE-079-S15"></a>Lease payments include in-substance fixed payments, which are payments that may in form appear to contain variability but are in effect unavoidable; the examples given, which are not exhaustive, include payments that do not create genuine variability, such as those resulting from clauses with no economic substance, and the lower of alternative sets of payments where the lessee must make at least one set. _(jurisdiction: United States, entity_scope: Lessees and lessors applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S15`
  > “842-10-55-31 Lease payments include in substance fixed lease payments. In
substance fixed payments are payments that may, in form, appear to contain
variability but are, in effect, unavoidable. In substance fixed payments for a lessee
or a lessor may include, for example, any of the following:
a.

Payments that do not create genuine variability (such as those that result
from clauses that do not have economic substance)

45

b.

The lower of the payments to be made when a lessee has a choice about
which set of payments it makes, although it must make at least one set
of payments.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Implementation Guidance > In Substance Fixed Payments, paragraph 842-10-55-31. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Not established from an authoritative source._

_Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government._

## The criteria that decide it, and what in the agreement shows each one
<a id="need-CG-MCE-079-P2"></a>

- See above: A contract is or contains a lease if it conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration, and that period of time may be described in terms of the amount of use of the identified asset. ([CG-MCE-079#S03](#s-CG-MCE-079-S03))

- See above: One of the finance-lease/sales-type classification criteria is that the lease transfers ownership of the underlying asset to the lessee by the end of the lease term. ([CG-MCE-079#S04](#s-CG-MCE-079-S04))

- See above: One of the finance-lease/sales-type classification criteria is that the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. ([CG-MCE-079#S05](#s-CG-MCE-079-S05))

- See above: One of the finance-lease/sales-type classification criteria is that the lease term is for the major part of the remaining economic life of the underlying asset; however, where the commencement date falls at or near the end of the underlying asset's economic life this criterion must not be used for classifying the lease. ([CG-MCE-079#S06](#s-CG-MCE-079-S06))

- See above: One of the finance-lease/sales-type classification criteria is that the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. ([CG-MCE-079#S07](#s-CG-MCE-079-S07))

- See above: One of the finance-lease/sales-type classification criteria is that the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. ([CG-MCE-079#S08](#s-CG-MCE-079-S08))

- See above: When none of the criteria in paragraph 842-10-25-2 are met, a lessee must classify the lease as an operating lease. ([CG-MCE-079#S09](#s-CG-MCE-079-S09))

- See above: The Update describes one reasonable approach to assessing the economic-life and present-value criteria, under which seventy-five percent or more of the remaining economic life would be a major part of that life, a commencement date within the last 25 percent of total economic life would be at or near the end of economic life, and ninety percent or more of fair value would amount to substantially all of fair value; it is presented as one reasonable approach rather than as a required bright line. ([CG-MCE-079#S10](#s-CG-MCE-079-S10))

- See above: The transfer-of-ownership criterion is met in leases that provide that, upon the lessee's performance in accordance with the lease terms, the lessor should execute and deliver to the lessee such documents (including, if applicable, a bill of sale) as may be required to release the underlying asset from the lease and transfer ownership to the lessee. ([CG-MCE-079#S11](#s-CG-MCE-079-S11))

- See above: A lease provision under which ownership of the underlying asset is not transferred if the lessee elects not to pay a specified fee (whether nominal or otherwise) to complete the transfer is an option to purchase the underlying asset and does not satisfy the transfer-of-ownership criterion. ([CG-MCE-079#S12](#s-CG-MCE-079-S12))

- See above: An entity must determine the lease term as the noncancellable period of the lease together with periods covered by a lessee extension option the lessee is reasonably certain to exercise, periods covered by a termination option the lessee is reasonably certain not to exercise, and periods covered by an option to extend or not to terminate whose exercise is controlled by the lessor. ([CG-MCE-079#S13](#s-CG-MCE-079-S13))

- See above: At the commencement date an entity assesses whether the lessee is reasonably certain to exercise or not exercise an option by considering all relevant economic factors (contract-based, asset-based, market-based and entity-based), which are interrelated and often require combined consideration; the paragraph gives a non-exhaustive list of example factors including the contractual terms for optional periods compared with current market rates, significant leasehold improvements expected to have significant economic value when the option becomes exercisable, costs of terminating the lease and signing a new one, and the importance of the underlying asset to the lessee's operations. ([CG-MCE-079#S14](#s-CG-MCE-079-S14))

- See above: The taxpayer's getting title to the property upon payment of a stated amount of "rental" payments required under the agreement is one of the conditions the IRS lists as a condition under which an agreement may, in general, be considered a conditional sales contract rather than a lease. ([CG-MCE-079#S16](#s-CG-MCE-079-S16))

- See above: Having an option to buy the property at a nominal price compared to the value of the property at the time the option may be exercised — that value being determined when the agreement is entered into — is one of the conditions the IRS lists as a condition under which an agreement may, in general, be considered a conditional sales contract rather than a lease. ([CG-MCE-079#S17](#s-CG-MCE-079-S17))

_Not established from an authoritative source._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, primary regulator or government._

## Which rulebook you are on, and whether it goes on your balance sheet
<a id="need-CG-MCE-079-C2"></a>

- <a id="s-CG-MCE-079-S18"></a>The FASB Accounting Standards Codification is stated to be the source of authoritative generally accepted accounting principles (GAAP) recognised by the FASB for application by nongovernmental entities. _(jurisdiction: United States, entity_scope: Nongovernmental entities applying US GAAP, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02))_ `CG-MCE-079#S18`
  > “The FASB Accounting Standards Codification® is the source of authoritative
generally accepted accounting principles (GAAP) recognized by the FASB to be
applied by nongovernmental entities.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Cover page notice, Accounting Standards Update No. 2016-02, February 2016. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S19"></a>Topic 842 affects any entity that enters into a lease as defined in the Update, subject to some specified scope exemptions, and the Update's guidance supersedes Topic 840, Leases. _(jurisdiction: United States, entity_scope: Any entity that enters into a lease, subject to specified scope exemptions, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02))_ `CG-MCE-079#S19`
  > “Topic 842 affects any entity that enters into a lease (as that term is defined in this
Update), with some specified scope exemptions. The guidance in this Update
supersedes Topic 840, Leases.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Summary, “Who Is Affected by the Amendments in This Update?”. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S20"></a>Topic 842 becomes effective for private companies and not-for-profit organizations that are not conduit bond obligors for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. _(jurisdiction: United States, entity_scope: Private companies and not-for-profit organizations that are not conduit bond obligors, accounting_basis: U.S. GAAP (FASB Accounting Standards Codification), effective_from: Fiscal years beginning after December 15, 2021 (interim periods within fiscal years beginning after December 15, 2022))_ `CG-MCE-079#S20`
  > “Topic 842 becomes
effective for private companies and not-for-profit organizations that are not conduit
bond obligors for fiscal years beginning after December 15, 2021, and interim
periods within fiscal years beginning after December 15, 2022.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2021-09, Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities](https://storage.fasb.org/ASU_2021-09.pdf), 2021-11-11; Summary, "When Will the Amendments Be Effective and What Are the Transition Requirements?", page 2. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S22"></a>As an accounting policy a lessee may elect not to apply the recognition requirements of Subtopic 842-20 to short-term leases and may instead recognise the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period the obligation is incurred; the election must be made by class of underlying asset to which the right of use relates. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S22`
  > “842-20-25-2 As an accounting policy, a lessee may elect not to apply the
recognition requirements in this Subtopic to short-term leases. Instead, a lessee
may recognize the lease payments in profit or loss on a straight-line basis over
the lease term and variable lease payments in the period in which the obligation
for those payments is incurred (consistent with paragraphs 842-20-55-1 through
55-2). The accounting policy election for short-term leases shall be made by class
of underlying asset to which the right of use relates.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Recognition > Short-Term Leases, paragraph 842-20-25-2. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S23"></a>A short-term lease is defined as a lease that at the commencement date has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S23`
  > “Short-Term Lease
A lease that, at the commencement date, has a lease term of 12 months or less
and does not include an option to purchase the underlying asset that the lessee
is reasonably certain to exercise.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Glossary, definition of “Short-Term Lease”. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S24"></a>As amended, paragraph 842-20-30-3 permits a lessee that is not a public business entity to use a risk-free discount rate for the lease instead of its incremental borrowing rate, determined using a period comparable with that of the lease term, as an accounting policy election made by class of underlying asset. _(jurisdiction: United States, entity_scope: Lessees that are not public business entities, accounting_basis: U.S. GAAP (FASB Accounting Standards Codification), conditions: The risk-free rate is determined using a period comparable with that of the lease term; The election is an accounting policy election made by class of underlying asset)_ `CG-MCE-079#S24`
  > “A lessee that is not a public
business entity is permitted to use a risk-free discount rate for the lease instead of
its incremental borrowing rate, determined using a period comparable with that of
the lease term, as an accounting policy election made by class of underlying asset
for all leases.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2021-09, Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities](https://storage.fasb.org/ASU_2021-09.pdf), 2021-11-11; Amendments to Subtopic 842-20, Leases—Lessee > Initial Measurement > Discount Rate for the Lease, paragraph 842-20-30-3, page 5. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S25"></a>A lessee that accounts for short-term leases under paragraph 842-20-25-2 must disclose that fact, and if the period's short-term lease expense does not reasonably reflect its short-term lease commitments, must disclose that fact and the amount of those commitments. _(jurisdiction: United States, entity_scope: Lessees electing the short-term lease exemption under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S25`
  > “842-20-50-8 A lessee that accounts for short-term leases in accordance with
paragraph 842-20-25-2 shall disclose that fact. If the short-term lease expense for
the period does not reasonably reflect the lessee’s short-term lease commitments,
a lessee shall disclose that fact and the amount of its short-term lease
commitments.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Disclosure, paragraph 842-20-50-8. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Partly established. Established: which reporting framework applies to a small US private business for arrangements of this kind (S19, S20). Missing: whether balance-sheet recognition is required; what relief or exemption is available._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._

## Your reporting framework, balance-sheet recognition, and the relief for a small private business
<a id="need-CG-MCE-079-P3"></a>

- See above: The FASB Accounting Standards Codification is stated to be the source of authoritative generally accepted accounting principles (GAAP) recognised by the FASB for application by nongovernmental entities. ([CG-MCE-079#S18](#s-CG-MCE-079-S18))

- See above: Topic 842 affects any entity that enters into a lease as defined in the Update, subject to some specified scope exemptions, and the Update's guidance supersedes Topic 840, Leases. ([CG-MCE-079#S19](#s-CG-MCE-079-S19))

- See above: Topic 842 becomes effective for private companies and not-for-profit organizations that are not conduit bond obligors for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. ([CG-MCE-079#S20](#s-CG-MCE-079-S20))

- See above: As an accounting policy a lessee may elect not to apply the recognition requirements of Subtopic 842-20 to short-term leases and may instead recognise the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period the obligation is incurred; the election must be made by class of underlying asset to which the right of use relates. ([CG-MCE-079#S22](#s-CG-MCE-079-S22))

- See above: A short-term lease is defined as a lease that at the commencement date has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. ([CG-MCE-079#S23](#s-CG-MCE-079-S23))

- See above: As amended, paragraph 842-20-30-3 permits a lessee that is not a public business entity to use a risk-free discount rate for the lease instead of its incremental borrowing rate, determined using a period comparable with that of the lease term, as an accounting policy election made by class of underlying asset. ([CG-MCE-079#S24](#s-CG-MCE-079-S24))

- See above: A lessee that accounts for short-term leases under paragraph 842-20-25-2 must disclose that fact, and if the period's short-term lease expense does not reasonably reflect its short-term lease commitments, must disclose that fact and the amount of those commitments. ([CG-MCE-079#S25](#s-CG-MCE-079-S25))

_Partly established. Established: which reporting framework applies to the reader's business (S19, S20); whether any relief or exemption is available to a smaller private business (S22, S24, S29). Missing: whether it requires arrangements of this kind to be recognised on the balance sheet._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._

## What each treatment puts in your books
<a id="need-CG-MCE-079-C4"></a>

- See above: Lease payments include in-substance fixed payments, which are payments that may in form appear to contain variability but are in effect unavoidable; the examples given, which are not exhaustive, include payments that do not create genuine variability, such as those resulting from clauses with no economic substance, and the lower of alternative sets of payments where the lessee must make at least one set. ([CG-MCE-079#S15](#s-CG-MCE-079-S15))

- See above: As an accounting policy a lessee may elect not to apply the recognition requirements of Subtopic 842-20 to short-term leases and may instead recognise the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period the obligation is incurred; the election must be made by class of underlying asset to which the right of use relates. ([CG-MCE-079#S22](#s-CG-MCE-079-S22))

- <a id="s-CG-MCE-079-S26"></a>At the commencement date a lessee must measure the lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement, and must measure the right-of-use asset as described in paragraph 842-20-30-5. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S26`
  > “842-20-30-1 At the commencement date, a lessee shall measure both of the
following:
a.
b.

The lease liability at the present value of the lease payments not yet
paid, discounted using the discount rate for the lease at lease
commencement (as described in paragraphs 842-20-30-2 through 30-4)
The right-of-use asset as described in paragraph 842-20-30-5.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Initial Measurement > General, paragraph 842-20-30-1. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S27"></a>At the commencement date the cost of the right-of-use asset must consist of the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date less any lease incentives received, and any initial direct costs incurred by the lessee. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S27`
  > “842-20-30-5 At the commencement date, the cost of the right-of-use asset shall
consist of all of the following:
a.
b.
c.

The amount of the initial measurement of the lease liability
Any lease payments made to the lessor at or before the commencement
date, minus any lease incentives received
Any initial direct costs incurred by the lessee (as described in
paragraphs 842-10-30-9 through 30-10).” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Initial Measurement > Initial Measurement of the Right-of-Use Asset, paragraph 842-20-30-5. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S28"></a>At the commencement date the lease payments must consist of the listed payments relating to use of the underlying asset during the lease term, including fixed payments (including in-substance fixed payments) less lease incentives, index- or rate-linked variable payments measured using the index or rate at commencement, the exercise price of a purchase option the lessee is reasonably certain to exercise, termination penalties where the lease term reflects exercise of a termination option, certain special-purpose-entity structuring fees, and for a lessee amounts probable of being owed under residual value guarantees. _(jurisdiction: United States, entity_scope: Entities applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S28`
  > “842-10-30-5 At the commencement date, the lease payments shall consist of
the following payments relating to the use of the underlying asset during the
lease term:
a.
b.
c.
d.
e.

f.

Fixed payments, including in substance fixed payments, less any lease
incentives paid or payable to the lessee (see paragraphs 842-10-55-30
through 55-31).
Variable lease payments that depend on an index or a rate (such as the
Consumer Price Index or a market interest rate), initially measured using
the index or rate at the commencement date.
The exercise price of an option to purchase the underlying asset if the
lessee is reasonably certain to exercise that option (assessed
considering the factors in paragraph 842-10-55-26).
Payments for penalties for terminating the lease if the lease term (as
determined in accordance with paragraph 842-10-30-1) reflects the
lessee exercising an option to terminate the lease.
Fees paid by the lessee to the owners of a special-purpose entity for
structuring the transaction. However, such fees shall not be included in
the fair value of the underlying asset for purposes of applying paragraph
842-10-25-2(d).
For a lessee only, amounts probable of being owed by the lessee under
residual value guarantees (see paragraphs 842-10-55-34 through 5536).” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Initial Measurement > Initial Measurement of the Lease Payments, paragraph 842-10-30-5. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S29"></a>A lessee should use the rate implicit in the lease whenever that rate is readily determinable and otherwise uses its incremental borrowing rate; a lessee that is not a public business entity is permitted, as an accounting policy election for all leases, to use a risk-free discount rate determined using a period comparable with the lease term. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842; the risk-free-rate election is available only to lessees that are not public business entities, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S29`
  > “842-20-30-3 A lessee should use the rate implicit in the lease whenever that rate
is readily determinable. If the rate implicit in the lease is not readily determinable,
a lessee uses its incremental borrowing rate. A lessee that is not a public
business entity is permitted to use a risk-free discount rate for the lease,
determined using a period comparable with that of the lease term, as an
accounting policy election for all leases.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Initial Measurement > Discount Rate for the Lease, paragraph 842-20-30-3. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S30"></a>For a finance lease, after the commencement date a lessee must recognise in profit or loss (unless the costs are included in the carrying amount of another asset under other Topics) amortisation of the right-of-use asset and interest on the lease liability, variable lease payments not included in the lease liability in the period the obligation is incurred, and any impairment of the right-of-use asset. _(jurisdiction: United States, entity_scope: Lessees with finance leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S30`
  > “842-20-25-5 After the commencement date, a lessee shall recognize in profit or
loss, unless the costs are included in the carrying amount of another asset in
accordance with other Topics:
a.
b.
c.

Amortization of the right-of-use asset and interest on the lease liability
Variable lease payments not included in the lease liability in the period
in which the obligation for those payments is incurred (see paragraphs
842-20-55-1 through 55-2)
Any impairment of the right-of-use asset determined in accordance with
paragraph 842-20-35-9.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Recognition > Finance Leases, paragraph 842-20-25-5. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S31"></a>For an operating lease, after the commencement date a lessee must recognise in profit or loss (unless the costs are included in the carrying amount of another asset under other Topics) a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis unless another systematic and rational basis is more representative (or the right-of-use asset has been impaired), variable lease payments not included in the lease liability in the period the obligation is incurred, and any impairment of the right-of-use asset. _(jurisdiction: United States, entity_scope: Lessees with operating leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S31`
  > “842-20-25-6 After the commencement date, a lessee shall recognize all of the
following in profit or loss, unless the costs are included in the carrying amount of
another asset in accordance with other Topics:
a.

b.
c.

A single lease cost, calculated so that the remaining cost of the lease (as
described in paragraph 842-20-25-8) is allocated over the remaining
lease term on a straight-line basis unless another systematic and rational
basis is more representative of the pattern in which benefit is expected to
be derived from the right to use the underlying asset (see paragraph
842-20-55-3), unless the right-of-use asset has been impaired in
accordance with paragraph 842-20-35-9, in which case the single lease
cost is calculated in accordance with paragraph 842-20-25-7
Variable lease payments not included in the lease liability in the period
in which the obligation for those payments is incurred (see paragraphs
842-20-55-1 through 55-2)
Any impairment of the right-of-use asset determined in accordance with
paragraph 842-20-35-9.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Recognition > Operating Leases, paragraph 842-20-25-6. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S32"></a>After the commencement date, for a finance lease a lessee must measure the lease liability by increasing its carrying amount to reflect interest and reducing it to reflect lease payments made, determining interest in each period as the amount producing a constant periodic discount rate on the remaining balance, and must measure the right-of-use asset at cost less accumulated amortisation and accumulated impairment losses. _(jurisdiction: United States, entity_scope: Lessees with finance leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S32`
  > “842-20-35-1 After the commencement date, for a finance lease, a lessee shall
measure both of the following:
a.

b.

The lease liability by increasing the carrying amount to reflect interest
on the lease liability and reducing the carrying amount to reflect the lease
payments made during the period. The lessee shall determine the
interest on the lease liability in each period during the lease term as the
amount that produces a constant periodic discount rate on the remaining
balance of the liability, taking into consideration the reassessment
requirements in paragraphs 842-10-35-1 through 35-5.
The right-of-use asset at cost less any accumulated amortization and
any accumulated impairment losses, taking into consideration the
reassessment requirements in paragraphs 842-10-35-1 through 35-5.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Subsequent Measurement > General, paragraph 842-20-35-1. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S33"></a>After the commencement date, for an operating lease a lessee must measure the lease liability at the present value of the lease payments not yet paid discounted using the discount rate established at commencement (unless updated under paragraph 842-20-35-5) and must measure the right-of-use asset at the amount of the lease liability adjusted for prepaid or accrued lease payments, the remaining balance of lease incentives received, unamortised initial direct costs and impairment, unless the right-of-use asset has previously been impaired. _(jurisdiction: United States, entity_scope: Lessees with operating leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S33`
  > “842-20-35-3 After the commencement date, for an operating lease, a lessee shall
measure both of the following:
a.

b.

The lease liability at the present value of the lease payments not yet paid
discounted using the discount rate for the lease established at the
commencement date (unless the rate has been updated after the
commencement date in accordance with paragraph 842-20-35-5, in
which case that updated rate shall be used)
The right-of-use asset at the amount of the lease liability, adjusted for the
following, unless the right-of-use asset has been previously impaired, in
which case the right-of-use asset is measured in accordance with
paragraph 842-20-35-10 after the impairment:
1. Prepaid or accrued lease payments
2. The remaining balance of any lease incentives received, which is the
amount of the gross lease incentives received net of amounts
recognized previously as part of the single lease cost described in
paragraph 842-20-25-6(a)
3. Unamortized initial direct costs
4. Impairment of the right-of-use asset.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Subsequent Measurement > General, paragraph 842-20-35-3. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S34"></a>A lessee must either present in the statement of financial position or disclose in the notes finance lease right-of-use assets and operating lease right-of-use assets separately from each other and from other assets, and finance lease liabilities and operating lease liabilities separately from each other and from other liabilities; right-of-use assets and lease liabilities are subject to the same current/noncurrent classification considerations as other nonfinancial assets and financial liabilities. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S34`
  > “842-20-45-1 A lessee shall either present in the statement of financial position or
disclose in the notes all of the following:
a.
b.

Finance lease right-of-use assets and operating lease right-of-use
assets separately from each other and from other assets
Finance lease liabilities and operating lease liabilities separately from
each other and from other liabilities.

Right-of-use assets and lease liabilities shall be subject to the same considerations
as other nonfinancial assets and financial liabilities in classifying them as current
and noncurrent in classified statements of financial position.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Other Presentation Matters > Statement of Financial Position, paragraph 842-20-45-1. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S35"></a>In the statement of comprehensive income a lessee must present, for finance leases, interest expense on the lease liability and amortisation of the right-of-use asset (which are not required to be presented as separate line items and must be presented consistently with how the entity presents other interest expense and depreciation or amortisation of similar assets) and, for operating leases, lease expense included in income from continuing operations. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S35`
  > “842-20-45-4 In the statement of comprehensive income, a lessee shall present
both of the following:
a.

b.

For finance leases, the interest expense on the lease liability and
amortization of the right-of-use asset are not required to be presented
as separate line items and shall be presented in a manner consistent with
how the entity presents other interest expense and depreciation or
amortization of similar assets, respectively
For operating leases, lease expense shall be included in the lessee’s
income from continuing operations.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Other Presentation Matters > Statement of Comprehensive Income, paragraph 842-20-45-4. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S36"></a>When creating the account, the user is told to select the Other Current Liabilities account type if the loan is to be paid in full within one year, and Long Term Liabilities if it is to be repaid in more than one year. _(jurisdiction: United States (QuickBooks Online United States edition; article served on the en-US QuickBooks support site), entity_scope: Businesses using QuickBooks Online that take a loan to purchase an asset, platform: QuickBooks Online, platform_edition: QuickBooks Online Advanced; QuickBooks Online Plus; QuickBooks Online Simple Start; QuickBooks Online Essentials; QuickBooks Ledger; Intuit Enterprise Suite; article updated 8/5/2026, conditions: Choice depends on the loan's repayment period: within one year vs. more than one year)_ `CG-MCE-079#S36`
  > “Select Other Current Liabilities if to be paid in full within one year. Select Long Term Liabilities if to be repaid in more than one year” — [Intuit Inc. — Record a loan for an asset in QuickBooks Online](https://quickbooks.intuit.com/learn-support/en-us/help-article/business-assets/record-loan-asset/L499QJijT_US_en_US), 2026-08-05; Heading "Set up a liability account", step 3 of the numbered account-creation steps. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S37"></a>The entry increases (credits) the loan/liability account and increases (debits) the corresponding asset account, by the amount of the loan. _(jurisdiction: United States (QuickBooks Online United States edition; article served on the en-US QuickBooks support site), entity_scope: Businesses using QuickBooks Online that take a loan to purchase an asset, platform: QuickBooks Online, platform_edition: QuickBooks Online Advanced; QuickBooks Online Plus; QuickBooks Online Simple Start; QuickBooks Online Essentials; QuickBooks Ledger; Intuit Enterprise Suite; article updated 8/5/2026)_ `CG-MCE-079#S37`
  > “We increase or credit the loan/liability account and increase or debit the right asset account.” — [Intuit Inc. — Record a loan for an asset in QuickBooks Online](https://quickbooks.intuit.com/learn-support/en-us/help-article/business-assets/record-loan-asset/L499QJijT_US_en_US), 2026-08-05; Heading "Create a journal entry for the loan", explanatory paragraph following the steps. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S38"></a>A lessee must disclose information about the nature of its leases, including a general description of them, the basis and terms and conditions on which variable lease payments are determined, the existence and terms and conditions of options to extend or terminate the lease, the existence and terms and conditions of lessee-provided residual value guarantees, and restrictions or covenants imposed by leases. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S38`
  > “842-20-50-3 A lessee shall disclose all of the following:
a.

Information about the nature of its leases, including:
1. A general description of those leases.
2. The basis and terms and conditions on which variable lease
payments are determined.
3. The existence and terms and conditions of options to extend or
terminate the lease. A lessee should provide narrative disclosure
about the options that are recognized as part of its right-of-use
assets and lease liabilities and those that are not.
4. The existence and terms and conditions of residual value
guarantees provided by the lessee.
5. The restrictions or covenants imposed by leases, for example, those
relating to dividends or incurring additional financial obligations.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Disclosure, paragraph 842-20-50-3(a). Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S39"></a>Contracts often bundle asset use with maintenance, utilities, support or other services; if these components are not separated properly the company may mismeasure the lease liability, and the error can also distort expense classification and reduce comparability across contracts. The list of bundled services is open-ended. _(jurisdiction: United States (US GAAP, ASC 842 — named by the article), entity_scope: Companies reporting leases, accounting_basis: US GAAP (ASC 842))_ `CG-MCE-079#S39`
  > “Failing to separate lease and non-lease components . Contracts often bundle asset use with maintenance, utilities, support, or other services. If these components are not separated properly, the company may mismeasure the lease liability. The error can also distort expense classification and reduce comparability across contracts.” — [AccountingTools, Inc. (Steven Bragg) — Lease Accounting Explained](https://www.accountingtools.com/articles/lease-accounting.html), 2026-05-05; Section “Common Lease Accounting Errors”, bullet “Failing to separate lease and non-lease components”. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S52"></a>A lessee must amortise the right-of-use asset from the commencement date to the earlier of the end of its useful life or the end of the lease term; however, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise a purchase option, the lessee must amortise the right-of-use asset to the end of the useful life of the underlying asset. _(jurisdiction: United States, entity_scope: Lessees with finance leases under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S52`
  > “842-20-35-8 A lessee shall amortize the right-of-use asset from the
commencement date to the earlier of the end of the useful life of the right-of-use
asset or the end of the lease term. However, if the lease transfers ownership of
the underlying asset to the lessee or the lessee is reasonably certain to exercise
an option to purchase the underlying asset, the lessee shall amortize the right-ofuse asset to the end of the useful life of the underlying asset.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Subsequent Measurement > Amortization of the Right-of-Use Asset for a Finance Lease, paragraph 842-20-35-8. Verified 2026-09-09.

_Partly established. Established: the ongoing charges each treatment produces (S35); which items appear on the balance sheet under the acquisition treatment (S34, S37). Missing: the entries each treatment produces; which terms of the agreement the ongoing records must carry for those charges to be maintained._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation._

## The accounts, the periodic charge, and the balance-sheet items each route creates
<a id="need-CG-MCE-079-P5"></a>

- See above: As an accounting policy a lessee may elect not to apply the recognition requirements of Subtopic 842-20 to short-term leases and may instead recognise the lease payments in profit or loss on a straight-line basis over the lease term and variable lease payments in the period the obligation is incurred; the election must be made by class of underlying asset to which the right of use relates. ([CG-MCE-079#S22](#s-CG-MCE-079-S22))

- See above: At the commencement date a lessee must measure the lease liability at the present value of the lease payments not yet paid, discounted using the discount rate for the lease at lease commencement, and must measure the right-of-use asset as described in paragraph 842-20-30-5. ([CG-MCE-079#S26](#s-CG-MCE-079-S26))

- See above: At the commencement date the cost of the right-of-use asset must consist of the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date less any lease incentives received, and any initial direct costs incurred by the lessee. ([CG-MCE-079#S27](#s-CG-MCE-079-S27))

- See above: At the commencement date the lease payments must consist of the listed payments relating to use of the underlying asset during the lease term, including fixed payments (including in-substance fixed payments) less lease incentives, index- or rate-linked variable payments measured using the index or rate at commencement, the exercise price of a purchase option the lessee is reasonably certain to exercise, termination penalties where the lease term reflects exercise of a termination option, certain special-purpose-entity structuring fees, and for a lessee amounts probable of being owed under residual value guarantees. ([CG-MCE-079#S28](#s-CG-MCE-079-S28))

- See above: A lessee should use the rate implicit in the lease whenever that rate is readily determinable and otherwise uses its incremental borrowing rate; a lessee that is not a public business entity is permitted, as an accounting policy election for all leases, to use a risk-free discount rate determined using a period comparable with the lease term. ([CG-MCE-079#S29](#s-CG-MCE-079-S29))

- See above: For a finance lease, after the commencement date a lessee must recognise in profit or loss (unless the costs are included in the carrying amount of another asset under other Topics) amortisation of the right-of-use asset and interest on the lease liability, variable lease payments not included in the lease liability in the period the obligation is incurred, and any impairment of the right-of-use asset. ([CG-MCE-079#S30](#s-CG-MCE-079-S30))

- See above: For an operating lease, after the commencement date a lessee must recognise in profit or loss (unless the costs are included in the carrying amount of another asset under other Topics) a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis unless another systematic and rational basis is more representative (or the right-of-use asset has been impaired), variable lease payments not included in the lease liability in the period the obligation is incurred, and any impairment of the right-of-use asset. ([CG-MCE-079#S31](#s-CG-MCE-079-S31))

- See above: After the commencement date, for a finance lease a lessee must measure the lease liability by increasing its carrying amount to reflect interest and reducing it to reflect lease payments made, determining interest in each period as the amount producing a constant periodic discount rate on the remaining balance, and must measure the right-of-use asset at cost less accumulated amortisation and accumulated impairment losses. ([CG-MCE-079#S32](#s-CG-MCE-079-S32))

- See above: After the commencement date, for an operating lease a lessee must measure the lease liability at the present value of the lease payments not yet paid discounted using the discount rate established at commencement (unless updated under paragraph 842-20-35-5) and must measure the right-of-use asset at the amount of the lease liability adjusted for prepaid or accrued lease payments, the remaining balance of lease incentives received, unamortised initial direct costs and impairment, unless the right-of-use asset has previously been impaired. ([CG-MCE-079#S33](#s-CG-MCE-079-S33))

- See above: A lessee must either present in the statement of financial position or disclose in the notes finance lease right-of-use assets and operating lease right-of-use assets separately from each other and from other assets, and finance lease liabilities and operating lease liabilities separately from each other and from other liabilities; right-of-use assets and lease liabilities are subject to the same current/noncurrent classification considerations as other nonfinancial assets and financial liabilities. ([CG-MCE-079#S34](#s-CG-MCE-079-S34))

- See above: In the statement of comprehensive income a lessee must present, for finance leases, interest expense on the lease liability and amortisation of the right-of-use asset (which are not required to be presented as separate line items and must be presented consistently with how the entity presents other interest expense and depreciation or amortisation of similar assets) and, for operating leases, lease expense included in income from continuing operations. ([CG-MCE-079#S35](#s-CG-MCE-079-S35))

- See above: When creating the account, the user is told to select the Other Current Liabilities account type if the loan is to be paid in full within one year, and Long Term Liabilities if it is to be repaid in more than one year. ([CG-MCE-079#S36](#s-CG-MCE-079-S36))

- See above: The entry increases (credits) the loan/liability account and increases (debits) the corresponding asset account, by the amount of the loan. ([CG-MCE-079#S37](#s-CG-MCE-079-S37))

- See above: A lessee must amortise the right-of-use asset from the commencement date to the earlier of the end of its useful life or the end of the lease term; however, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise a purchase option, the lessee must amortise the right-of-use asset to the end of the useful life of the underlying asset. ([CG-MCE-079#S52](#s-CG-MCE-079-S52))

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference, official platform documentation._

## What to pull out of the agreement before you post anything
<a id="need-CG-MCE-079-P6"></a>

- See above: The transfer-of-ownership criterion is met in leases that provide that, upon the lessee's performance in accordance with the lease terms, the lessor should execute and deliver to the lessee such documents (including, if applicable, a bill of sale) as may be required to release the underlying asset from the lease and transfer ownership to the lessee. ([CG-MCE-079#S11](#s-CG-MCE-079-S11))

- See above: An entity must determine the lease term as the noncancellable period of the lease together with periods covered by a lessee extension option the lessee is reasonably certain to exercise, periods covered by a termination option the lessee is reasonably certain not to exercise, and periods covered by an option to extend or not to terminate whose exercise is controlled by the lessor. ([CG-MCE-079#S13](#s-CG-MCE-079-S13))

- See above: At the commencement date an entity assesses whether the lessee is reasonably certain to exercise or not exercise an option by considering all relevant economic factors (contract-based, asset-based, market-based and entity-based), which are interrelated and often require combined consideration; the paragraph gives a non-exhaustive list of example factors including the contractual terms for optional periods compared with current market rates, significant leasehold improvements expected to have significant economic value when the option becomes exercisable, costs of terminating the lease and signing a new one, and the importance of the underlying asset to the lessee's operations. ([CG-MCE-079#S14](#s-CG-MCE-079-S14))

- See above: At the commencement date the cost of the right-of-use asset must consist of the amount of the initial measurement of the lease liability, any lease payments made to the lessor at or before the commencement date less any lease incentives received, and any initial direct costs incurred by the lessee. ([CG-MCE-079#S27](#s-CG-MCE-079-S27))

- See above: At the commencement date the lease payments must consist of the listed payments relating to use of the underlying asset during the lease term, including fixed payments (including in-substance fixed payments) less lease incentives, index- or rate-linked variable payments measured using the index or rate at commencement, the exercise price of a purchase option the lessee is reasonably certain to exercise, termination penalties where the lease term reflects exercise of a termination option, certain special-purpose-entity structuring fees, and for a lessee amounts probable of being owed under residual value guarantees. ([CG-MCE-079#S28](#s-CG-MCE-079-S28))

- See above: A lessee must disclose information about the nature of its leases, including a general description of them, the basis and terms and conditions on which variable lease payments are determined, the existence and terms and conditions of options to extend or terminate the lease, the existence and terms and conditions of lessee-provided residual value guarantees, and restrictions or covenants imposed by leases. ([CG-MCE-079#S38](#s-CG-MCE-079-S38))

- See above: Contracts often bundle asset use with maintenance, utilities, support or other services; if these components are not separated properly the company may mismeasure the lease liability, and the error can also distort expense classification and reduce comparability across contracts. The list of bundled services is open-ended. ([CG-MCE-079#S39](#s-CG-MCE-079-S39))

_Not established from an authoritative source._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._

## Your books and your tax return can land in different places
<a id="need-CG-MCE-079-C3"></a>

- <a id="s-CG-MCE-079-S40"></a>Because accounting methods and tax law differ, the amount an employer can deduct for tax purposes may not be the same as the amount it deducts on its business books and records; the publication's illustration is meals, where 100% of the cost can be deducted on the business books and records but only 50% is allowed by law as a tax deduction. _(jurisdiction: United States (federal income tax), entity_scope: Employers reimbursing employees' travel and non-entertainment-related meals expenses, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published; the meals figure is given as an example, at the 50% limit stated in this publication)_ `CG-MCE-079#S40`
  > “Because of differences between accounting methods and tax law, the amount you
can deduct for tax purposes may not be the
same as the amount you deduct on your business books and records. For example, you can
deduct 100% of the cost of meals on your business books and records. However, only 50% of
these costs are allowed by law as a tax deduction.” — [Internal Revenue Service, Department of the Treasury — Publication 535, Business Expenses (Cat. No. 15065Z), For use in preparing 2022 Returns](https://www.irs.gov/pub/irs-prior/p535--2022.pdf), Feb 2, 2023; Chapter 11 (Other Expenses), Reimbursement of Travel and Non-Entertainment-Related Meals — Reimbursements. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S41"></a>There may be instances in which a taxpayer must determine whether its payments are for rent or for the purchase of the property; the taxpayer must first determine whether the agreement is a lease or a conditional sales contract, and payments made under a conditional sales contract are not deductible as rent expense. _(jurisdiction: United States (federal income tax), entity_scope: Taxpayers making payments for the use of property under an agreement that may be a lease or a conditional sales contract, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)_ `CG-MCE-079#S41`
  > “Lease or purchase. There may be instances
in which you must determine whether your payments are for rent or for the purchase of the
property. You must first determine whether your
agreement is a lease or a conditional sales contract. Payments made under a conditional sales
contract are not deductible as rent expense.” — [Internal Revenue Service, Department of the Treasury — Publication 535, Business Expenses (Cat. No. 15065Z), For use in preparing 2022 Returns](https://www.irs.gov/pub/irs-prior/p535--2022.pdf), Feb 2, 2023; Chapter 3 (Rent Expense), Rent — Lease or purchase. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S42"></a>If the agreement is a lease, the taxpayer may deduct the payments as rent. _(jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax, conditions: the agreement is a lease)_ `CG-MCE-079#S42`
  > “If the agreement is a lease , you may deduct the payments as rent.” — [Internal Revenue Service, U.S. Department of the Treasury — Income & Expenses 7 (Frequently Asked Questions) - equipment lease payments versus conditional sales contract](https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-7), 2026-09-05; Answer, first paragraph, second sentence. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S43"></a>The cost of property treated as outright purchased and used in a trade or business may generally be recovered through depreciation deductions. _(jurisdiction: United States (federal income tax; Internal Revenue Service guidance), entity_scope: Taxpayers in a trade or business acquiring equipment for use in that trade or business (page category: small business, self-employed, other business), accounting_basis: U.S. federal income tax, conditions: the agreement is a conditional sales contract, so the taxpayer is the outright purchaser; the property is used in a trade or business)_ `CG-MCE-079#S43`
  > “You may generally recover the cost of such property used in a trade or business through depreciation deductions.” — [Internal Revenue Service, U.S. Department of the Treasury — Income & Expenses 7 (Frequently Asked Questions) - equipment lease payments versus conditional sales contract](https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses-7), 2026-09-05; Answer, first paragraph, fourth sentence. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S44"></a>Payments made to change certain provisions in a lease must be capitalized and amortized over the remaining period of the lease and cannot be deducted as additional rent, even if they are described as rent in the agreement. _(jurisdiction: United States (federal income tax), entity_scope: Lessees paying an additional amount to modify a lease, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)_ `CG-MCE-079#S44`
  > “You must capitalize these
payments and amortize them over the remaining period of the lease. You can’t deduct the
payments as additional rent, even if they are
described as rent in the agreement.” — [Internal Revenue Service, Department of the Treasury — Publication 535, Business Expenses (Cat. No. 15065Z), For use in preparing 2022 Returns](https://www.irs.gov/pub/irs-prior/p535--2022.pdf), Feb 2, 2023; Chapter 3 (Rent Expense), Cost of Getting a Lease — Cost of a modification agreement. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S45"></a>Generally, where the special rules for certain leases of tangible property apply, an accrual method of accounting (and time value of money principles) must be used for rental expenses regardless of the taxpayer's overall method of accounting. _(jurisdiction: United States (federal income tax), entity_scope: Taxpayers whose leases of tangible property meet the conditions for the section 467 special rules stated in this section, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)_ `CG-MCE-079#S45`
  > “Generally, if the special rules apply, you
must use an accrual method of accounting (and
time value of money principles) for your rental
expenses, regardless of your overall method of
accounting.” — [Internal Revenue Service, Department of the Treasury — Publication 535, Business Expenses (Cat. No. 15065Z), For use in preparing 2022 Returns](https://www.irs.gov/pub/irs-prior/p535--2022.pdf), Feb 2, 2023; Chapter 3 (Rent Expense), Rent — Leases over $250,000. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S46"></a>When an expense can be deducted depends on the taxpayer's accounting method, which is a set of rules used to determine when and how income and expenses are reported; the two basic methods are the cash method and the accrual method, and whichever method is chosen must clearly reflect income. _(jurisdiction: United States (federal income tax), entity_scope: Businesses deducting business expenses on U.S. federal income tax returns, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)_ `CG-MCE-079#S46`
  > “When you can deduct an expense depends on
your accounting method. An accounting
method is a set of rules used to determine when
and how income and expenses are reported.
The two basic methods are the cash method
and the accrual method. Whichever method
you choose must clearly reflect income.” — [Internal Revenue Service, Department of the Treasury — Publication 535, Business Expenses (Cat. No. 15065Z), For use in preparing 2022 Returns](https://www.irs.gov/pub/irs-prior/p535--2022.pdf), Feb 2, 2023; Chapter 1 (Deducting Business Expenses), When Can I Deduct an Expense?. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

- <a id="s-CG-MCE-079-S47"></a>Generally, IRS approval must be obtained to change a method of accounting; Form 3115 is filed to request a change to a permissible method of accounting for amortization. _(jurisdiction: United States (federal income tax), entity_scope: Taxpayers changing their method of accounting for amortization, accounting_basis: U.S. federal income tax reporting, conditions: Publication 535 is for use in preparing 2022 returns; the 2022 edition is the final revision; Pub. 535 will no longer be revised and published)_ `CG-MCE-079#S47`
  > “Generally, you must get IRS approval to change
your method of accounting. File Form 3115 to
request a change to a permissible method of
accounting for amortization.” — [Internal Revenue Service, Department of the Treasury — Publication 535, Business Expenses (Cat. No. 15065Z), For use in preparing 2022 Returns](https://www.irs.gov/pub/irs-prior/p535--2022.pdf), Feb 2, 2023; Chapter 8 (Amortization), Incorrect Amount of Amortization Deducted — Changing Your Accounting Method. Verified 2026-09-09.
  _Flagged for professional review — a bookkeeper or accountant should confirm this applies to your situation._

_Not established from an authoritative source._

## Rent deduction versus purchase for tax, and keeping the two sets of figures straight
<a id="need-CG-MCE-079-P4"></a>

- See above: Because accounting methods and tax law differ, the amount an employer can deduct for tax purposes may not be the same as the amount it deducts on its business books and records; the publication's illustration is meals, where 100% of the cost can be deducted on the business books and records but only 50% is allowed by law as a tax deduction. ([CG-MCE-079#S40](#s-CG-MCE-079-S40))

- See above: There may be instances in which a taxpayer must determine whether its payments are for rent or for the purchase of the property; the taxpayer must first determine whether the agreement is a lease or a conditional sales contract, and payments made under a conditional sales contract are not deductible as rent expense. ([CG-MCE-079#S41](#s-CG-MCE-079-S41))

- See above: If the agreement is a lease, the taxpayer may deduct the payments as rent. ([CG-MCE-079#S42](#s-CG-MCE-079-S42))

- See above: The cost of property treated as outright purchased and used in a trade or business may generally be recovered through depreciation deductions. ([CG-MCE-079#S43](#s-CG-MCE-079-S43))

- See above: Payments made to change certain provisions in a lease must be capitalized and amortized over the remaining period of the lease and cannot be deducted as additional rent, even if they are described as rent in the agreement. ([CG-MCE-079#S44](#s-CG-MCE-079-S44))

- See above: Generally, where the special rules for certain leases of tangible property apply, an accrual method of accounting (and time value of money principles) must be used for rental expenses regardless of the taxpayer's overall method of accounting. ([CG-MCE-079#S45](#s-CG-MCE-079-S45))

- See above: When an expense can be deducted depends on the taxpayer's accounting method, which is a set of rules used to determine when and how income and expenses are reported; the two basic methods are the cash method and the accrual method, and whichever method is chosen must clearly reflect income. ([CG-MCE-079#S46](#s-CG-MCE-079-S46))

- See above: Generally, IRS approval must be obtained to change a method of accounting; Form 3115 is filed to request a change to a permissible method of accounting for amortization. ([CG-MCE-079#S47](#s-CG-MCE-079-S47))

_Not established from an authoritative source._

## When the arrangement ends: return, buy, or renew
<a id="need-CG-MCE-079-C5"></a>

- <a id="s-CG-MCE-079-S50"></a>A termination of a lease resulting from the lessee's purchase of the underlying asset is not the type of termination contemplated by paragraph 842-20-40-1 but is an integral part of the purchase, and any difference between the purchase price and the carrying amount of the lease liability immediately before the purchase must be recorded by the lessee as an adjustment of the carrying amount of the asset; this does not apply to underlying assets acquired in a business combination. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S50`
  > “842-20-40-2 The termination of a lease that results from the purchase of an
underlying asset by the lessee is not the type of termination of a lease
contemplated by paragraph 842-20-40-1 but, rather, is an integral part of the
purchase of the underlying asset. If the lessee purchases the underlying asset,
any difference between the purchase price and the carrying amount of the lease
liability immediately before the purchase shall be recorded by the lessee as an
adjustment of the carrying amount of the asset. However, this paragraph does not
apply to underlying assets acquired in a business combination, which are initially
measured at fair value in accordance with paragraph 805-20-30-1.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Derecognition > Purchase of the Underlying Asset, paragraph 842-20-40-2. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S51"></a>In the Update's illustrative Example 23, when the lessee exercises the purchase option at the end of Year 5 it settles the remaining lease liability (which equals the option exercise price) and, if the right-of-use asset was not previously presented together with property, plant, and equipment, reclassifies the right-of-use asset to property, plant, and equipment and applies Topic 360 to it beginning on the date the purchase option is exercised. _(jurisdiction: United States, entity_scope: Illustrative example of a lessee finance lease of equipment with a purchase option under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Illustrative example, not a separate requirement; Pending content of Topic 842 as amended by ASU 2016-02)_ `CG-MCE-079#S51`
  > “842-10-55-217 At the end of Year 5, the carrying amount of the right-of-use asset
is $71,094 ($248,834 – [$35,548 × 5]), and the remaining lease liability is $5,000,
which is the exercise price of the purchase option. Lessee exercises the purchase

80

option and settles the remaining lease liability. If the right-of-use asset was not
previously presented together with property, plant, and equipment, Lessee
reclassifies the right-of-use asset to property, plant, and equipment and applies
Topic 360 to the asset beginning on the date the purchase option is exercised.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Illustrations > Example 23—Lessee Purchase Option, paragraph 842-10-55-217. Verified 2026-09-09.

- See above: A lessee must amortise the right-of-use asset from the commencement date to the earlier of the end of its useful life or the end of the lease term; however, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise a purchase option, the lessee must amortise the right-of-use asset to the end of the useful life of the underlying asset. ([CG-MCE-079#S52](#s-CG-MCE-079-S52))

- <a id="s-CG-MCE-079-S53"></a>If a lease is modified and the modification is not accounted for as a separate contract under paragraph 842-10-25-8, the entity must reassess the classification of the lease as of the effective date of the modification based on its modified terms and conditions and the facts and circumstances as of that date. _(jurisdiction: United States, entity_scope: Entities applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S53`
  > “842-10-25-9 If a lease is modified and that modification is not accounted for as a
separate contract in accordance with paragraph 842-10-25-8, the entity shall
reassess the classification of the lease as of the effective date of the
modification based on its modified terms and conditions and the facts and
circumstances as of that date (for example, the fair value and remaining
economic life of the underlying asset as of that date).” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Recognition > Lease Modifications, paragraph 842-10-25-9. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S54"></a>A lessee must reallocate the remaining consideration in the contract and remeasure the lease liability using a discount rate determined at the effective date of the modification if the modification grants an additional right of use not accounted for as a separate contract, extends or reduces the term of an existing lease other than through exercise of a contractual option to extend or terminate, fully or partially terminates an existing lease, or changes only the consideration in the contract. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S54`
  > “842-10-25-11 A lessee shall reallocate the remaining consideration in the
contract and remeasure the lease liability using a discount rate for the lease
determined at the effective date of the modification if a contract modification
does any of the following:
a.
b.

c.
d.

Grants the lessee an additional right of use not included in the original
contract (and that modification is not accounted for as a separate contract
in accordance with paragraph 842-10-25-8)
Extends or reduces the term of an existing lease (for example, changes
the lease term from five to eight years or vice versa), other than through
the exercise of a contractual option to extend or terminate the lease (as
described in paragraph 842-20-35-5)
Fully or partially terminates an existing lease (for example, reduces the
assets subject to the lease)
Changes the consideration in the contract only.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Recognition > Lease Modifications > Lessee, paragraph 842-10-25-11. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S55"></a>A lessee must reassess the lease term or a lessee purchase option only if and at the point in time that one of the listed events occurs: a significant event or change in circumstances within the lessee's control that directly affects whether the lessee is reasonably certain to exercise or not exercise an extension, termination or purchase option; an event written into the contract obliging the lessee to exercise or not exercise an extension or termination option; the lessee elects to exercise an option previously assessed as not reasonably certain; or the lessee elects not to exercise an option previously assessed as reasonably certain. _(jurisdiction: United States, entity_scope: Lessees applying Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S55`
  > “842-10-35-1 A lessee shall reassess the lease term or a lessee option to
purchase the underlying asset only if and at the point in time that any of the
following occurs:
a.

b.
c.
d.

There is a significant event or a significant change in circumstances that
is within the control of the lessee that directly affects whether the lessee
is reasonably certain to exercise or not to exercise an option to extend or
terminate the lease or to purchase the underlying asset.
There is an event that is written into the contract that obliges the lessee
to exercise (or not to exercise) an option to extend or terminate the lease.
The lessee elects to exercise an option even though the entity had
previously determined that the lessee was not reasonably certain to do
so.
The lessee elects not to exercise an option even though the entity had
previously determined that the lessee was reasonably certain to do so.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-10, Subsequent Measurement > Lease Term and Purchase Options, paragraph 842-10-35-1. Verified 2026-09-09.

- <a id="s-CG-MCE-079-S56"></a>If the lease term or the assessment of a lessee purchase option changes so that the remaining lease term extends more than 12 months beyond the end of the previously determined lease term, or the lessee becomes reasonably certain to exercise its purchase option, the lease no longer meets the definition of a short-term lease and the lessee must apply the remainder of Topic 842 as if the date of the change in circumstances were the commencement date. _(jurisdiction: United States, entity_scope: Lessees applying the short-term lease exemption under Topic 842, accounting_basis: US GAAP (FASB Accounting Standards Codification, Topic 842, as amended by ASU 2016-02), conditions: Pending content of Topic 842 as amended by ASU 2016-02; effective for a reporting entity per paragraph 842-10-65-1)_ `CG-MCE-079#S56`
  > “842-20-25-3 If the lease term or the assessment of a lessee option to purchase
the underlying asset changes such that, after the change, the remaining lease term
extends more than 12 months from the end of the previously determined lease
term or the lessee is reasonably certain to exercise its option to purchase the
underlying asset, the lease no longer meets the definition of a short-term lease
and the lessee shall apply the remainder of the guidance in this Topic as if the date
of the change in circumstances is the commencement date.” — [Financial Accounting Standards Board of the Financial Accounting Foundation — Accounting Standards Update No. 2016-02, Leases (Topic 842), Section A - Leases: Amendments to the FASB Accounting Standards Codification](https://storage.fasb.org/ASU%202016-02_Section%20A.pdf), 2016-02; Section A, Subtopic 842-20, Recognition > Short-Term Leases, paragraph 842-20-25-3. Verified 2026-09-09.

_Partly established. Established: how each treatment is concluded when the arrangement ends by exercise of a purchase option (S50); how each treatment is concluded when the arrangement ends by renewal (S54). Missing: how each treatment is concluded when the arrangement ends by return of the equipment._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._

## What to post on return of the equipment, exercise of a purchase option, or renewal
<a id="need-CG-MCE-079-P7"></a>

- See above: A termination of a lease resulting from the lessee's purchase of the underlying asset is not the type of termination contemplated by paragraph 842-20-40-1 but is an integral part of the purchase, and any difference between the purchase price and the carrying amount of the lease liability immediately before the purchase must be recorded by the lessee as an adjustment of the carrying amount of the asset; this does not apply to underlying assets acquired in a business combination. ([CG-MCE-079#S50](#s-CG-MCE-079-S50))

- See above: In the Update's illustrative Example 23, when the lessee exercises the purchase option at the end of Year 5 it settles the remaining lease liability (which equals the option exercise price) and, if the right-of-use asset was not previously presented together with property, plant, and equipment, reclassifies the right-of-use asset to property, plant, and equipment and applies Topic 360 to it beginning on the date the purchase option is exercised. ([CG-MCE-079#S51](#s-CG-MCE-079-S51))

- See above: A lessee must amortise the right-of-use asset from the commencement date to the earlier of the end of its useful life or the end of the lease term; however, if the lease transfers ownership of the underlying asset to the lessee or the lessee is reasonably certain to exercise a purchase option, the lessee must amortise the right-of-use asset to the end of the useful life of the underlying asset. ([CG-MCE-079#S52](#s-CG-MCE-079-S52))

- See above: If a lease is modified and the modification is not accounted for as a separate contract under paragraph 842-10-25-8, the entity must reassess the classification of the lease as of the effective date of the modification based on its modified terms and conditions and the facts and circumstances as of that date. ([CG-MCE-079#S53](#s-CG-MCE-079-S53))

- See above: A lessee must reallocate the remaining consideration in the contract and remeasure the lease liability using a discount rate determined at the effective date of the modification if the modification grants an additional right of use not accounted for as a separate contract, extends or reduces the term of an existing lease other than through exercise of a contractual option to extend or terminate, fully or partially terminates an existing lease, or changes only the consideration in the contract. ([CG-MCE-079#S54](#s-CG-MCE-079-S54))

- See above: A lessee must reassess the lease term or a lessee purchase option only if and at the point in time that one of the listed events occurs: a significant event or change in circumstances within the lessee's control that directly affects whether the lessee is reasonably certain to exercise or not exercise an extension, termination or purchase option; an event written into the contract obliging the lessee to exercise or not exercise an extension or termination option; the lessee elects to exercise an option previously assessed as not reasonably certain; or the lessee elects not to exercise an option previously assessed as reasonably certain. ([CG-MCE-079#S55](#s-CG-MCE-079-S55))

- See above: If the lease term or the assessment of a lessee purchase option changes so that the remaining lease term extends more than 12 months beyond the end of the previously determined lease term, or the lessee becomes reasonably certain to exercise its purchase option, the lease no longer meets the definition of a short-term lease and the lessee must apply the remainder of Topic 842 as if the date of the change in circumstances were the commencement date. ([CG-MCE-079#S56](#s-CG-MCE-079-S56))

_Partly established. Established: what happens at the end of the arrangement under each treatment on exercise of a purchase option (S50); what happens at the end of the arrangement under each treatment on renewal (S54). Missing: what happens at the end of the arrangement under each treatment on return of the equipment._

_Required authority: authoritative professional or accounting standard. Highest achieved: high quality professional secondary reference._

## Fixing an arrangement recorded the wrong way in earlier periods
<a id="need-CG-MCE-079-C6"></a>

_Not established from an authoritative source._

_Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government._

## Correcting a misclassified arrangement and what must be restated or disclosed
<a id="need-CG-MCE-079-P8"></a>

_Not established from an authoritative source._

_Required authority: authoritative professional or accounting standard. Highest achieved: primary regulator or government._

## Not yet fully established from an authoritative source

- Establish the criteria that determine whether an equipment or vehicle arrangement is a rental or an acquisition financed over time, and what in an agreement evidences each criterion, and that the classification rests on the substance of those terms rather than on the label the agreement or the vendor applies to the arrangement. _(partly established; below the required authority class)_
- Establish which reporting framework applies to a small US private business for arrangements of this kind, whether balance-sheet recognition is required, and what relief or exemption is available. _(partly established; below the required authority class)_
- Establish whether the treatment used for tax purposes can differ from the classification used in the books, and what a business must maintain when the two differ. _(not established)_
- Establish the entries and ongoing charges each treatment produces, including which items appear on the balance sheet under the acquisition treatment, and which terms of the agreement the ongoing records must carry for those charges to be maintained. _(partly established; below the required authority class)_
- Establish how each treatment is concluded when the arrangement ends by return of the equipment, by exercise of a purchase option, or by renewal. _(partly established; below the required authority class)_
- Establish how an arrangement recorded on the wrong treatment in prior periods is corrected, and what must be restated or disclosed as a result. _(not established; below the required authority class)_
- Establish that the treatment follows the substance of the arrangement's terms rather than the label the agreement or the vendor applies to it. _(not established; below the required authority class)_
- Identify the criteria that decide the classification and state, for each, what in the agreement evidences it. _(not established; below the required authority class)_
- Establish which reporting framework applies to the reader's business, whether it requires arrangements of this kind to be recognised on the balance sheet, and whether any relief or exemption is available to a smaller private business. _(partly established; below the required authority class)_
- Distinguish the classification used in the books from the treatment applied for tax purposes, establish that the two can differ, and state what the business must maintain when they do. _(not established)_
- Establish what each treatment produces in the books, naming the accounts, the periodic charges and the balance-sheet items created under the acquisition route. _(established; below the required authority class)_
- Specify what must be extracted from the agreement both to make the determination and to set up the ongoing records. _(not established; below the required authority class)_
- Establish what happens at the end of the arrangement under each treatment, covering return of the equipment, exercise of a purchase option, and renewal. _(partly established; below the required authority class)_
- Establish how an arrangement recorded on the wrong treatment in prior periods is corrected, including what must be restated or disclosed. _(not established; below the required authority class)_

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_Reference date 2026-09-07. Statements are quoted verbatim from their sources; scope and verification dates are shown on each._