Formal
A lease (see separate definition) is a Capital Lease if:- a) Lessee owns property at end of lease OR b) Lease term is greater than 75% of economic life of the asset OR c) Net Present Value of rental and lease payment is greater than 90% of its fair market value. Reported ‘On Balance Sheet’.
Real-world Example
A company leases a piece of manufacturing equipment for 8 years, almost its entire useful life, so accounting rules treat it as a capital lease - recording the equipment as an asset (and the lease as debt) on the balance sheet, much as if it had bought it outright.
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