Accounting Finance & Operating Leases

Accounting Finance & Operating Leases

1. What's a Lease?

   • A lease is an agreement whereby ownership of an asset remains with the lessor but the lessee is granted the right to use the asset for an agreed period of time in return for specified payments.
   • Types of Leases
     • Finance Lease
       • Capital Lease
         • Distinguishing Factors
           • 1) Ownership of the asset is transferred to the lessee at the end of the lease term. 2) The option for a bargain purchase 3) The lease term covers a major portion of the economic useful life of the asset 4) At inception the, pv of lease payments amounts close to the fair value of the asset at T0.
     • Operating Lease
       • Rental Expense or Hire Charges
         • Distinguishing Factors
           • Short-term Commitments, Usually do not cover the entirety of the economic useful life,