Lease Classification Test
Related terms
Category
ASC 842
The lease classification test consists of five criteria under ASC 842 that determine whether a lease is classified as a finance lease or an operating lease. If any one of the five criteria is met, the lease is classified as a finance lease.
Why it matters
The five criteria are: (1) transfer of ownership by end of term, (2) purchase option reasonably certain to be exercised, (3) lease term is for a major part of the asset's remaining economic life, (4) present value of lease payments equals or exceeds substantially all of the asset's fair value, and (5) the asset is specialized with no alternative use. If none are met, the lease is operating.
Getting classification right at commencement is critical because it determines the expense pattern for the entire lease term. Reclassification mid-lease is rare and only triggered by specific modification events.
How Arvexi handles this
Arvexi evaluates all five criteria automatically using the lease data extracted by Document Intelligence. The AI agent flags borderline cases where classification is sensitive to assumptions, like lease term relative to useful life, so your team can apply judgment where it matters.