What criteria indicate a finance (capital) lease under traditional frameworks?

• A. Transfer of ownership at end of term or bargain purchase option, lease term spanning most of the asset's economic life, PV of payments close to the asset's fair value, or asset customization.
• B. Lease term is 12 months with no transfer and no bargain purchase option.
• C. Lessee pays only service fees and uses the asset temporarily.
• D. Contract is labeled as a lease but treated as an operating lease for accounting.

Answer: (A)

In traditional frameworks, a finance (capital) lease is one that essentially finances the asset for the lessee, so it’s treated as if the lessee owns the asset for accounting purposes. The indicators are: ownership transfer at the end of the term or a bargain purchase option that gives the lessee a good chance to own the asset; a lease term that spans a major portion of the asset’s economic life; the present value of the minimum lease payments being close to the asset’s fair value; and the asset being so specialized that only the lessee can use it without significant modification. When these conditions are met, the lease is recorded on the lessee’s balance sheet with an asset and a corresponding liability, reflecting a financing arrangement rather than a simple rental. The other scenarios describe short-term, service-based, or specifically labeled arrangements that do not meet the criteria for a finance lease.