From an Accounting perspective:

Financial reporting is strictly defined by rules of the Financial Accounting Standards Board (FASB). All leases are classified as either a capital (finance) or operating lease (off balance sheet) for financial reporting purposes. FASB seeks to determine if the risks and benefits of ownership are transferred from:

• The lease transfers ownership of the property to the lessee
• The lease contains a bargain purchase option
• The lease term is equal to 75% or more of the estimated economic life of leased property
• The present value of the minimum lease payments equals or exceeds 90% of the original value of the leased property

All leases that fail to meet all of these four criteria are classified and accounted for by the lessee as operating leases.

Operating Lease
The lease is accounted for as a pure rental. The equipment is neither shown as a liability nor an asset on the lessee's business balance sheet.

Capital (Finance) Lease
The lease is treated the same way as a purchase. The equipment is shown as an asset and a liability on the lessee's business balance sheet.

Summary of Financial Statement Effects: Lessee

	Capital Lease	Operating Lease
Total Assets	Higher	Lower
Total Liabilities	Higher	Lower
Total Lease Related Expenses	Initially Higher	Initially Lower
Net Income	Initially Lower	Initially Higher
Cash Flow from Operations	Higher	Lower
Cash Flow from Financing Activities	Lower	Higher
Leverage  Ratio: Debt/Equity	Higher	Lower
Return on Assets	Lower	Higher

 

Interested in making the right financing decision, contact ST Capital today.

*Please consult you tax advisor regarding any tax or accounting questions