Leveraged leases have a separate accounting classification under US GAAP; IFRS does not have the concept of leveraged leases.  Under US GAAP, a leveraged lease qualifies as an operating lease for the lessee and a capital lease for the lessor.

A lease must meet the definition of a direct-financing lease to be accounted for as a leveraged lease.  Those that meet the definition of sales-type or operating leases for lessors cannot qualify as a leveraged lease and are treated as a true lease for the lessor and an operating lease for the lessee.

To qualify as a leveraged lease under US GAAP, the transaction must qualify as a capital lease (except for the 90% fair market value criterion) and meet the following three additional criteria:

  1. Have at least a lessor, a lessee and a long-term creditor in the transaction;
  2. Have substantial debt financing provided to the transaction by the long-term creditor without recourse to the lessor; and
  3. Show a decrease in the lessor’s net investment in the lease’s early years and an increase in the later years until the net investment is eliminated.
Leveraged Lease Criteria Decision Tree

This is a decision tree used to determine whether a transaction qualifies as a leveraged lease under US GAAP, where the transaction must (a) qualify as a capital lease (except for the 90% fair market value criterion); (b) have at least a lessor, a lessee and a long-term creditor; have substantial nonrecourse debt financing provided by the long-term creditor; and show a decrease in the lessor’s net investment in the lease’s early years and an increase in the later years until the net investment is eliminated.

Source:

This is a decision tree used to determine whether a transaction qualifies as a leveraged lease under US GAAP, where the transaction must (a) qualify as a capital lease (except for the 90% fair market value criterion); (b) have at least a lessor, a lessee and a long-term creditor; have substantial nonrecourse debt financing provided by the long-term creditor; and show a decrease in the lessor’s net investment in the lease’s early years and an increase in the later years until the net investment is eliminated.

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