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Capital lease
A lease agreement transfers substantially all the benefits and risks of ownership of the asset to the lessee if at least one of the following criteria is met:
1) The lease provides for the transfer of ownership of the leased property.
2) The lease contains a bargain purchase option (BPO).
3) The lease term is% or more of the estimated economic life of the leased property.
4) The present value of the minimum lease payments is at least% of the fair value of the leased property
It increase assets and liabilities into balance sheet
Operating lease
- If the long-term lease does not meet any of the above criteria.
- In an operating lease, the lessor retains substantially all of the benefits and risks of ownership. Such a lease is a regular rental agreement
-The lessee reports periodic rental expense for the amount of rent paid, but no leased asset or liability is recognized (it increases expense , therefore affecting income)
An operating lease is treated like renting ... Payments are considered operational expenses and the asset being leased stays off the balance sheet. In contrast, a capital lease is more like a loan,the asset is treated as being owned by the lessee so its stays on the balance sheet.
