What is a bargain purchase option in leases?
If the lessee has the option to buy the asset at the end of the lease life for an amount significantly below fair market value, then that is considered a bargain purchase option and the lessee should record the lease as a finance lease.
If the lessee has the option to purchase the equipment at fair market value at the end of the lease, then that does not represent a bargain purchase option.
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Under U.S. GAAP, there is five key criteria that you must assess to determine whether the lessee records the lease as a finance or operating lease. If the lease meets any of the criteria, then it must be recorded as a finance lease. The five criteria relates to a bargain purchase option, transfer of ownership, […]
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