What is the 75% economic life threshold in determining whether is a lease is finance or operating?
The 75% economic life threshold says that if the life of the lease is equal to 75% or more of the useful life of the asset, then it should be recorded as a finance lease.
For example, if the lessee leases an asset for 8 years, and the assets entire useful life is only 10 years, then that represent 80% of the useful life. It would be tough for the lessor to turn around and lease it again since there is very little useful life left. Therefore, the lessee would need to account for the lease as a finance lease.
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