Final answer:
If a lease does not meet the specified criteria of a capital lease, it is considered an operating lease. Under this classification, leases are treated like rental transactions with payments recognized as expenses over the term.
Step-by-step explanation:
If the lease does not meet any of those four criteria, it is classified as an operating lease. In accounting, a lease is considered a capital lease (or finance lease) if it meets any of the following conditions: ownership of the asset transfers to the lessee by the end of the lease term, it contains a bargain purchase option, the lease term is for the majority of the asset's economic life, or if the present value of lease payments equals or exceeds substantially all the fair value of the leased asset.
If a lease does not meet these criteria, it does not provide the lessee with the risks and benefits typical of ownership and thus is treated as an operating lease. Operating leases are treated as rental transactions. In this situation, lease payments are recognized as an expense on the income statement over the lease term. As of recent accounting standards updates, though, there may be changes requiring operating leases to be listed on the balance sheet as well.