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A Finance Lease, also called a Capital Lease, is a lease that meets at least
one of the criteria outlined in paragraph 7 of FASB 13 and, therefore, must be
treated essentially as a loan for book accounting purposes.
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The four criteria are:
1. Title passes automatically by the end of the lease term.
2. Lease contains a bargain purchase option (i.e., less than the fair market
value).
3. Lease term is greater than 75% of estimated economic life of the equipment.
4. Present value of lease payments is greater than 90% of the equipment's fair
market value.
A Capital Lease is treated by the lessee as both the borrowing of funds and the
acquisition of an asset to be depreciated; thus the lease is recorded on the
lessee's balance sheet as an asset and corresponding liability (lease payable).
Periodic lessee expenses consist of interest on the debt and depreciation of
the asset.
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finance lease | operating
lease | structured lease
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