Lease Classification How do companies determine whether to use the finance method or the operating method? From the lessee's perspective, a lessee should classify a lease based on whether the arrangement is effectively a purchase of the underlying asset. If the lease transfers control (or ownership) of the underlying asset to a lessee, then the lease is classified as a finance lease. In this situation, the lessee takes ownership or consumes the substantial portion of the underlying asset over the lease term. All leases that do not meet any of the finance lease tests are classified as operating leases. In an operating lease, a lessee obtains the right to use the underlying asset but not ownership of the asset itself...
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