Bargain Purchase Option


DEFINITION of 'Bargain Purchase Option'

An option in a lease agreement that allows the lessee to purchase the leased asset at the end of the lease period at a price substantially below its fair market value. The bargain purchase option is one of four criteria, any one of which, if satisfied, would require the lease to be classified as a capital or financing lease that must be disclosed on the lessee's balance sheet. The objective of this classification is to prevent "off-balance sheet" financing by the lessee.

BREAKING DOWN 'Bargain Purchase Option'

For example, assume that the value of an asset at the end of the lease period is estimated at $100,000, but the lease agreement has an option that enables the lessee to purchase it for $70,000. This would be considered as a bargain purchase option and would require the lessee to treat the lease as a capital lease.

There are significant differences in the accounting treatment of the leased asset and lease payments for capital leases and operating leases.

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