- An operating lease is economically similar to renting an asset
- A company that enters into an operating lease as the lessee records a lease expense on its income statement during the period it uses the asset
- No asset and liability is recorded on the balance sheet
- On the statement of cash flow, the full lease payment is shown as an operating cash outflow
Capital Lease: Lessee
- A capital lease is economically similar to borrowing money and buying an asset
- A company that enters into a finance lease as the lessee reports an asset (leased asset) and related debt (lease payable) on the balance sheet
- The initial value of both the leased asset and lease payable is the present value of future lease payments
- On the income statement, the company reports interest expense on the debt, and if the asset acquired is depreciable, the company reports depreciation expense
- Reported debt is higher and expenses are generally higher in the early years
Operating Lease: Lessor
- The lessor records any lease revenue when earned
- The lessor continues to report the leased asset on the balance sheet and the asset's associated depreciation expense on the income statement
Capital Lease: Lessor
- The lessor reports a lease receivable based on the present value of future lease payments and reduces its assets by the carrying value of the asset leased
- Two types of capital lease:
- Direct financing lease - It results when the present value of lease payment (and thus the amount recorded as a lease receivables) equals the carrying value of the leased asset.
- Sales-type lease - If results when the present value of lease payments (and thus the amount recorded as a lease receivable) exceeds the carrying value of the leased asset. A lessor reports revenue from the sale, cost of goods sold, profit on the sale, and interest revenue earned from financing the sale
