Should a lease with a fiscal funding clause automatically disqualify it as a capital lease?

A lease characterized by a fiscal funding clause does not automatically disqualify it as a capital lease because the relevant consideration is the likelihood of the funding being available in future periods. If the invocation of the fiscal funding clause is deemed remote, then the lease can still be classified as a capital lease.

A capital lease is one that meets specific criteria outlined in accounting standards, typically involving ownership transfer, bargain purchase options, or a significant portion of the asset's useful life being utilized under the lease. The presence of a fiscal funding clause merely indicates that funding must be appropriated annually; it does not inherently change the substance of the leasing arrangement.

Thus, if you determine that the likelihood of financing not being available is low—meaning that the entity is expected to renew the lease and continue using the asset—then the lease can qualify as a capital lease despite the fiscal funding clause. This distinction is essential in proper lease accounting and helps maintain alignment with the economic reality of the lease agreement.