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.

  1. Operating Lease

    A contract that allows for the use of an asset, but does not ...
  2. Lease

    A legal document outlining the terms under which one party agrees ...
  3. Capital Lease

    A lease considered to have the economic characteristics of asset ...
  4. Leaseback

    An arrangement where the seller of an asset leases back the same ...
  5. Lessee

    The person who rents land or property from a lessor. The lessee ...
  6. Accountant

    A professional who performs accounting functions such as audits ...
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