a. capital lease:
A capital lease would be considered a purchased asset for accounting purposes. A
lease
considered to have the
economic characteristics of asset ownership. A lease falls into capital
lease category if any of the following requirements are met:
1. The life of the lease is 75% or greater of the
assets useful life.
2. The lease contains
a purchase agreement for less than market value. 3. The lessee gains ownership at the
end of
the
lease period.
b.Finance Lease
A finance lease also referred to as a lease or business lease, it amy suit those businesses who
wish to have an off Balance Sheet style of funding. Lessee (user) is not the
owner of the goods so the
value of the goods will not be
entered on his/her balance sheet so neither the
contingent liability.
Key Features of a
Finance Lease:
Features of Finance lease:
a) Lease period: One lease exists for the
whole useful life of the asset though may be a
primary and secondary period.
b) Lessor’s business: The lessor does not usually deal directly in this
type of asset.
c) Risks and rewards: The lessor does not retain the
risks or rewards of ownership. Lessee
responsible for repairs and maintenance.
d) Cancellation: The lease agreement cannot be cancelled. The lessee has a liability for all
payments.
e) Substance: The purchase of the asset by the lessee financed by a loan from the lessor, i.e. it is effectively a source of medium- to long-term debt finance.
c.Operating Lease
An operating lease is a lease whose term is short compared to the useful life of the
asset or
piece of equipment being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis.
Features of Operating lease:
a) Lease period: The lease period is less
than the useful life of the
asset. The lessor relies on
subsequent leasing or eventual sale of the
asset to cover his capital outlay and show a profit.
b) Lessor’s business: The lessor may very well carry on a trade in this type of asset. c) Risks and rewards: The lessor is normally responsible for repairs and maintenance. d)
Cancellation: The lease can sometimes be
cancelled at short notice. e) Substance: The
substance of the transaction is the
short-term rental of an asset.