Capital Lease

AAA

DEFINITION of 'Capital Lease'

A lease considered to have the economic characteristics of asset ownership. A capital lease would be considered a purchased asset for accounting purposes. An operating lease, on the other hand, would be handled as a true lease, or rental, for accounting purposes. The choice of lease classification will have important results on a firm's financial statements. A lease falls into this category if any of the following requirements are met:

1. The life of the lease is 75% or greater of the assets useful life.

2. The lease contains a purchase agreement for less than market value.

3. The lessee gains ownership at the end of the lease period.

4. The present value of lease payments is greater than 90% of the asset's market value.

INVESTOPEDIA EXPLAINS 'Capital Lease'

A capital lease is an example of accrual accounting's inclusion of economic events. Generally, companies have a choice of which type of lease they wish to use for accounting purposes, however, both types of leases provide specific advantages and disadvantages to financial statements. For example, companies wishing to show a higher return on asset ratios would choose an operating lease, as the balance sheet would not account for the item as an asset, thus reducing the denominator in the ratio.

RELATED TERMS
  1. Renewal Option

    A clause in a lease that outlines the terms for renewing or extending ...
  2. Shell Lease

    A commercial lease in which a tenant rents a property with an ...
  3. Conditional Sales Agreement

    A lease agreement banks can offer to business customers that ...
  4. Percentage Lease

    A type of lease where the tenant pays a base rent plus a percentage ...
  5. True Lease

    A specific type of multi-year lease which does not pass on ownership ...
  6. Graduated Lease

    A type of long-term, typically for commercial property, lease ...
Related Articles
  1. The Essentials Of Corporate Cash Flow ...
    Retirement

    The Essentials Of Corporate Cash Flow ...

  2. Operating Cash Flow: Better Than Net ...
    Markets

    Operating Cash Flow: Better Than Net ...

  3. Why might a bond agreement limit the ...
    Investing

    Why might a bond agreement limit the ...

  4. Uncovering Hidden Debt
    Bonds & Fixed Income

    Uncovering Hidden Debt

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center