What are the rules on changing a capital lease to an operating lease? How do you go about this approach, and would you have to go back to the inception of the lease to incorporate the change? Any and all thoughts are greatly appreciated.
Reclass of a capital lease to an operating lease
Answers
Matt,
Once the original classification has been determined, you're stuck with it until the expiration of the original or remaining term of the lease that was used to classify the lease in the first place. If the company exercises any extensions of the lease, you are supposed to retest the lease and it is possible that is could become an operating lease. Correction of an error in the original classification (e.g. error in the application of the standard), if appropriate, is an entirely different situation - have to talk to your accountants on that one.
1
It is possible to reclassify the lease during it's term rather than only on lease extension, so long as you have renegotiated the terms & conditions of the lease. That would require substantially all the risks & rewards of ownership being transferred to the lessor (usually transferring residual
Matt,
I'll respond more completely depending on how you answer this question:
Is the change brought about by an evaluation that the lease was previously misclassified, or has the lease been renegotiated and thus the terms changed to require the reclassification?
Does anyone have any good resources to share around the new regulations around lease
1
I would say that EY has a pretty good leasing guide. PwC's is embedded into their Accounting Research Manual. In general I'm not a big fan of Deloittes Q&A format, but for pointed questions, they may have a direct answer to your question.
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