A capital lease is recorded as an asset and as an obligation at an amount equal to the present value of the property being leased. Capital leases are determined by any one of the following criteria:

1. The lease transfers ownership of the property to the lessee by the end of the lease term.
   
   
2. The lease contains a bargain purchase option.
   
   
3. The terms of agreement are equal to 75% or more of the estimated useful life. (NOTE: If the lease falls within the remaining 25% of useful life, the above criteria is no longer valid.)
   
   
4. "The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory cost such as insurance, maintenance, and taxes to be paid by the Lessor, including any profit thereon, equals or exceeds 90% of the excess of the fair value of the leased property to the lessor at the inception of the Lease." (AICPA Professional Standards Volume 3, Section 4053.007)

When applying the above criteria to land and buildings the following should be applied:

1. If the lease falls under items A or B, the land and buildings should be capitalized separately.
   
   
2. If the lease falls under C or D and the fair value of the land is less than 25% of the total, then the land and building is considered as a single unit. If the value of the land is 25% or more, then the land and buildings are considered separately.

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