capital lease

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Definition of capital lease in English English dictionary: A lease of real or personal property which meets the criteria for capitalizing an asset and recording a liability in the accounting records; A lease that must be accounted for on the Lessee's balance sheet as an asset (the equipment) and a liability (the lease payments) A capital lease will meet at least one of the following criteria; Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, if it meets any one of the following criteria: (a) the lessor transfers ownership to the lessee at the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or (d) the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor (Also see finance lease ); (also called - Finance Lease or Non-Tax Lease) - A term from the FASB Accounting Rules for leasing For accounting purposes (book books) a finance or tax lease is defined as either a "capital lease" or an "operating lease" A capital lease must be shown in the asset and liability sections of a balance sheet An operating lease is not - hence the term "off balance sheet financing" However, operating lease obligations of 12 months or longer are shown in the footnotes to the balance sheet The following 4 tests are used to determine whether a lease agreement is a "capital" or "operating" lease for accounting purposes: (if the lease meets any of these criteria, it is a capital lease, otherwise it is an operating lease); Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, provided it meets any one of the following criteria; (a) the lessor transfers ownership to the lessee at the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75% or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or (d) the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor (Also see Finance Lease ); A lease that under financial accounting standards must be reflected on a company's balance sheet as an asset and corresponding liability Generally, it is a lease under which the lessee acquires all the economic benefits and risks of the leased property as opposed to just paying for the use of the property; is a lease obligation that has to be capitalized on the balance sheet It is characterized by: it is non-cancelable; the life of lease is less than the life of the asset(s) being leased; and, the lessor does not pay for the upkeep, maintenance, or servicing costs of the asset(s) during the lease period; A lease obligation that has to be capitalized on the balance sheet The lease is treated by lessee as both the borrowing of funds and the acquisition of an asset to be amortized Both the liability and the asset are recognized on the balance sheet, Expenses consist of interest on the debt and amortization of the asset Contrast with operating lease; A fixed-term rental agreement that meets certain tests; considered for accounting purposes to be similar to a purchase See Lease Test The Accounting Department in the Business Affairs Office is responsible for evaluating leases to determine the appropriate classification See also Operating Lease; A lease that meets at least one of the criteria outlined in FASB 13 (see FASB definition below) and, therefore, is viewed as a sale of equipment from the perspective of the lessor and as a purchase from the perspective of the lessee; Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing if it meets the following criteria: (a) the lessor transfers ownership to the lessee at the end of the lease term; (b) the lessee contains an option to purchase the asset at a bargain price; (c) the lessee term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of it;s useful life); or (d) the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset The foregoing is set forth in the financial Accounting Standards Board Statement #13 (FASB No 13) (See Finance Lease); Capital Leases are treated as a purchase by the customer and a sale by the lessor The typical characteristics are as follows: Substantially all the risks and rewards of the asset are passed to the customer, it should be presumed that such a transfer of risks and rewards occurs if at the inception of a lease the present value of the minimum lease payments amounts to substantially all (90% typically) of the fair value of the leased asset Usually there is a bargain purchase option at the end of the agreement (eg$1 00 ); 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 The four criteria are: title passes automatically by the end of the lease term; lease contains a bargain purchase option (i e , less than the fair market value; lease term is greater than 75% of estimated economic life of the equipment; and 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; Under FAS 13, a lease is classified and accounted for by a lessee as a "Capital Lease" if it meets any of the following criteria; If long-term ownership of the equipment is your goal, a capital lease might be your best choice It would be categorized on your balance sheet just like a bank loan, with deductible interest expense on your income statement But, at the end of your lease, you can purchase the equipment for a modest sum Most purchase options range from $1 to 10% of equipment cost [to top]; Leases can have various designations A capital lease means that the unit leasing (leasee) the asset, in substance, has rights and obligations that are just as if the unit owned the asset For example, if the unit promises to pay the lease for 10 years and that payment meets certain criteria then the leasee must treat the 10 year payment like a long term obligation The unit cannot simply say it is only obligated for the forthcoming year; 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 The four criteria are: title passes automatically by the end of the lease term lease contains a bargain purchase option (i e , less than the fair market value) lease term is greater than 75% of estimated economic life of the equipment present value of lease payments is greater than 90% of the equipment's fair market value; Has a term that spans at least 75 percent of the useful life of the leased property; A lease which meets at least one of the criteria in paragraph 7 of the FAS 13 standards, meaning that the lease must be treated essentially as a loan for book accounting purposes A lease is a capital lease if any one of the following is true: (a) the lease automatically transfers ownership of equipment to the lessee at the end of the lease term; (b)the lease contains an option to purchase equipment at a bargain price; (c) the lease term is equal to 75 percent or more of the estimated useful life of the equipment (does not apply to used property); or (d) the present value of the minimum lease rental payments equals 90 percent or more of the fair market value of the leased property; A specific classification of a lease for accounting purposes The classification of the lease will determine how the lease is to be accounted for A lease is accounted for by the lessee as a capital lease if it meets one of the following criteria: (a) at the end of the lease, the lessee owns the property being leased; (b) at the end of the lease, the lessee can purchase the property for a bargain purchase option; (c) the lease term exceeds 75% of the estimated economic life of the leased property; (d) the present value of all lease payments is equal to 90% or more of the cost of the leased property