capital lease

Examples of capital lease in the following topics:

• Capital Leases vs. Operating Leases

  • Capital leases and operating leases are two types of leases with different criteria.
  • A capital lease (or finance lease) is a type of lease.
  • Under US accounting standards, a finance (capital) lease is a lease which meets at least one of the following criteria:
  • An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased.
  • Unlike a Financial Lease or Finance lease, at the end of the operating lease the title to the asset does not pass to the lessee, but remains with the lessor.

• Overview of Lease Accounting

  • There are two types of leases: capital leases and operating leases and each has a different accounting methodology.
  • There are two types of leases capital leases and operating leases.
  • A capital lease is a form of debt-equity financing in which the lease acts like loan.
  • To that end, a capital lease must be recorded as liability on the company's balance sheet, it is important to note that the IRS treats capital leases as a liability.
  • Under a capital lease, the lessee does not record rent as an expense.

• Impact of Leasing on the Income Statement

  • In accounting, leases can be considered either operating leases or capital leases (also called financial leases).
  • When determining whether a lease is capital or operating, the following criteria are useful considerations:
  • If any one of these criteria are accurate in a given leasing contract, the lease is considered a capital lease and thus will impact the assets and liabilities of the balance sheet.
  • With a capital lease, the lessee does not record rent as an expense.
  • Improvements: If improvements are made, they should be capitalized and depreciated over the lease life.

• Advantages of Leasing

  • Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than by purchasing property.
  • Capital assets may fluctuate in value.
  • Leasing shifts risks to the lessor, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains.
  • Depreciation of capital assets has different tax and financial reporting treatment from ordinary business expenses.
  • Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term.

• It's not just photocopiers and carpets

  • Electronic equipment, paint, cars, wood pallets, reusable totes, furniture, rags and linens, parts washers, almost anything – including temperature – can be leased.
  • The Carrier air-conditioning company in the USA, for example, leases cooling services to its clients rather than air conditioners.
  • (Hawken, Paul, Lovins, Amory, and Lovins, Hunter, Natural Capitalism) As with any leasing arrangement, ownership of Carrier's air-conditioning equipment is maintained by the company, which means that Carrier is highly motivated to keep its products in optimum condition.
  • In a similar fashion, the Bank of Japan collaborated with Japanese power companies to facilitate the leasing of energy-efficient automobiles, home appliances and water heaters to everyday consumers.

• Institutions, Markets, and Intermediaries

  • Other financial intermediaries include: credit unions, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers.
  • As noted, financial intermediaries provide access to capital.
  • By repurposing funds from savers to borrowers financial intermediaries are able to promote economic growth by providing access to capital.
  • Banks convert deposits to loans and thereby increase access to capital by serving as a financial intermediary between savers and borrowers.

• Capital and Technology

  • Firms add capital to the point where the value of marginal product of capital is equal to the rental rate of capital.
  • Capital is a factor of production, along with labor and land.
  • Firms may buy, rent, or lease infrastructure and tools in the capital market, but even if the firm owns these factors of production, the opportunity cost of using this capital is the foregone rent that the firm could receive if it rented the capital to somebody else rather than using it for production.
  • The value of marginal product (VMP) of capital is the marginal product of capital multiplied by price.
  • Firms will increase the quantity of capital hired to the point where the value of marginal product of capital is equal to the rental rate of capital.

• Introduction to Resource Extension Part 2

  • If it depreciates, lease it. ' John Paul Getty, Billionaire
  • (Hart, Stuart, Capitalism at the Crossroads)
  • To achieve this goal, Interface developed what it calls an ‘Ever-Green Lease' in which the company focuses on leasing what a carpet is supposed to deliver rather than selling the carpet itself.
  • This is good news for customers because it means that when a leased carpet begins to show wear, Interface will come in, pull up the worn areas, and immediately replace them (a service that is part of the lease arrangement).
  • (Hawken, Paul, Lovins, Amory, and Lovins, Hunter, Natural Capitalism)

• Does leasing always close the manufacturing loop?

  • Sometimes a customer will purchase a leased product at the end of the lease term and never return it to the manufacturer.
  • Similarly, after a transfer of ownership, the customer may sell the leased product on the second-hand market.
  • Both of these practices can break the closed-loop cycle needed for leasing to provide its benefits.
  • In this regard, products may need months or perhaps years of redesigning or rethinking before leasing can become profitable.
  • (Fishbein, Bett, McGary, Lorraine, and Dillon, Patricia, ‘Leasing: A Step toward Producer Responsibility', Inform Inc.)

• Leasing

  • For example, customers often lease software products.
  • Additional advantages of B2B leasing agreements include flexible lease-to-own programs.
  • A lease can be structured to allow the purchase of equipment at the end of the lease for fair market value of the hardware.
  • However, some leases will allow product upgrades before the end of the lease.
  • Leasing terms sometimes include hidden fees and penalties at the conclusion of the lease, all of which can cost the organization extra money.