Operating vs. Capital Leasing

Operating vs. Capital Leasing

Leases fall into one of two categories of financial transactions:

Operating leases, which are treated as current operating expenses and do not affect the balance sheet at all. 

A lease is an Operating lease unless it meets any one of these four criteria:

  1. The lease transfers ownership of the property to the lessee by the end of the lease term.
  2. The lease contains a bargain purchase option.
  3. The lease term is equal to 75% or more of the estimated economic life of the leased property.
  4. The present value of the minimum lease payments equals or exceeds 90% of the excess of the fair value of the leased property to the lessor. 

Capital leases, which are treated as the acquisition of assets and incurrence of obligations by the lessee and add to both the asset and liability side of the balance sheet.