Criteria for Leases
#3 Lease term is greater than or equal to 75% of the economic life of the asset (extended for a bargain renewal option). (Does not apply if the lease inception is within the last 25% of asset’s life.) This is called the economic life test.
#4 Present value of the minimum lease payments (PVMLP) excluding executory costs, is greater than or equal to 90% of the fair value of the leased property. MLP are the sum of the rental payments, any guaranteed residual value plus any BPO plus any required penalties. This is called the recovery of investment test. (Does not apply if the lease inception is within the last 25% of the asset’s life.)