Capital Leases and Operating Leases

ACCT 3303

CAPITAL LEASE vs. OPERATING LEASE

Capital Lease vs. Operating Lease

Firms often choose to lease long-term assets rather than buy them for a variety of reasons including the tax benefits that are greater to the lessor than the lessees and leases offer more flexibility in terms of adjusting to changes in technology and capacity needs. Lease payments create the same kind of obligation that interest payments on debt create, and have to be viewed in a similar light. If a firm is allowed to lease a significant portion of its assets and keep it off its financial statements, an examination of the statements will give a very misleading view of the company's financial strength. Consequently, accounting rules have been devised to force firms to reveal...