Final answer:
Operating leases are classified based on criteria like transfer of ownership, lease term, purchase option, and present value of lease payments.
Step-by-step explanation:
Classification Criteria for Operating Leases
The classification criteria for operating leases can be categorized into four main criteria:
- Transfer of ownership: Operating leases do not involve the transfer of ownership of the leased asset to the lessee.
- Term of lease: Operating leases have a shorter term compared to the useful life of the leased asset.
- Purchase option: Operating leases do not have a purchase option for the lessee to acquire the asset at the end of the lease term.
- Present value of lease payments: Operating leases have a present value of lease payments that is significantly less than the fair value of the leased asset.
By considering these criteria, operating leases are classified differently from finance leases which involve the transfer of ownership, longer lease terms, purchase options, and higher present values of lease payments.