Lesson: Lease Classification Process

In this lesson, Nick Palazzolo, CPA, demystifies the lease classification process by introducing a five-step criteria used to differentiate between operating and finance leases. Diving into real-world examples such as leasing a car, Nick breaks down the concepts of "real" or operating leases versus finance leases, usually referred to as disguised purchases. The lesson explores various determinants, including the lease term, the present value of lease payments, and any special considerations for the underlying asset’s unique nature. The emphasis is on understanding the rationale behind the classification per GAAP and FASB standards and how this affects companies' financial statements. Additionally, Nick walks through how both operating and finance leases impact financial reporting, providing a clear framework for proper lease classification in accordance with the most recent lease standards.