As a general rule, when a lease is structured in such a way that a lessee can purchase the leased equipment for a predetermined amount that is inferior to the fair market value of the equipment, the lessee should capitalize and treat this transaction as a loan.
When a lease allows a lessee to return the equipment at end of term without any additional obligation, then the lease rentals can be expensed. The lessee may have the option to purchase the equipment as long as the price is a fair representation of the market value of the equipment.
The contract of lease thus involves the followings :
The supplier provides and sells the equipment to a buyer.
This is the person who owns the property and equipment and assigns to the "lessee" the right to use the equipment in return for a rental amount, and this for the duration of the lease.
It is the user of the equipment leased by the lessor.
When a lease, by its structure, allows the lessee to purchase the equipment for a predetermined amount and less than the fair market value of the equipment, then the company must capitalized the equipment and process the lease as a loan.
When a lease allows the lessee to return the equipment at the end of the term without additional obligation than the rent can be processed as an expense in the company. The lessee can always buy the equipment as long as its price is relative to the fair market value of the equipment.