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FASB13

This US lease classification procedure is for the purposes of preparing financial accounts conforming to US GAAP. The procedure presents four criteria, any one of which is met then the lease will be capital (i.e. finance lease). The tax status of the lease does not impact the decision.
The lessor and lessee each consider the criteria independently (the lessor, however, has two additional criteria that also must be met, see below).
The decision is made at the inception of the lease and is irrevocable notwithstanding future changes in economic circumstances, e.g., material residual devaluation. The inception date is the date of the lease agreement, or commitment if earlier.

  1. Is there an automatic transfer of ownership? If yes then the lease is capital.
     
  2. Does a bargain purchase option exist? If yes then the lease is capital.
     
  3. Is the lease term greater than or equal to 75% of the asset’s economic life? If yes then the lease is capital.

    (i) The asset’s economic life is the life in the hands of multiple users with normal repairs and maintenance
    (ii)The lease term is the fixed non-cancellable term of the lease plus:
    •         All periods covered by bargain renewal options
    •         All periods covered by high failure to renew charges
    •         All periods covered by a lessee guarantee of any lessor debt related to the leased property
    •         All periods covered by a lessee loan to the lessor
    •         All periods covered by ordinary renewal options preceding a bargain purchase option
    •         All periods representing renewals or extensions at the lessor’s option
    (iii) This criterion is ignored if the property is used at the inception of the lease and is in the last 25 percent of its economic life
     
  4. Is the present value of the minimum lease payments greater than or equal to 90% of the asset’s fair market value reduced by any lessor retained ITC?

    5. (i)       Discount rate
    •         From the lessor’s perspective - the implicit rate
    •         From the lessee’s perspective - the lower of:
    a)       The incremental, pretax, coterminous borrowing rate
    b)       The lessor’s implicit rate in the lease, if known by the lessee

  5. (Lessor only) Collectibility of the minimum lease payments is reasonably predictable, although normal estimates of uncollectibility will not preclude a capital lease.
     
  6. (Lessor only) No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease.

    7. (i)       Estimates of executory costs are not considered important uncertainties.
    (ii)      Lessor guarantees beyond a normal warranty may be considered an important uncertainty.

From the above it can be seen that FASB13 is similar to IAS17, hence when consolidating IAS17 lease classifications are normally acceptable to US entities.