What is a Synthetic Lease

A synthetic lease occurs when a special purpose entity established by a parent company purchases an asset then leases it back to the parent company. As a result, the asset is shown on the balance sheet of the special purpose entity, which treats the lease as a capital lease and charges depreciation expense against its earnings. However, the asset does not show up on the balance sheet of the parent company. Instead, the parent company treats the lease as an operating lease. With an operating lease, the lease payment is deducted as an expense on the income statement.

BREAKING DOWN Synthetic Lease

A synthetic lease allows a company to lease an asset to itself, and be treated as a capital lease for tax purposes and an operating lease for accounting purposes. The structure of the synthetic lease allows a company to control real estate without being required to show the real estate as an asset on the financial statements. After the Enron crisis, laws tightened and the prevalence of synthetic leases waned. However, they are making a comeback for entities that have the resources to navigate the new regulatory landscape.