Capital Lease – fixed-term lease similar to a loan agreement for
purchase of capital asset on installments.
Lessor’s services are limited to financing the asset, the lessee pays
all other costs, including insurance, maintenance, and taxes. Capital leases are regarded as
essentially-equivalent to a sale by the lessor.
Must be shown on lessee’s balance sheet as a fixed asset. Lessee acquires all economic benefits (such
as depreciation) and risks (such as the loss of the leased asset) of ownership,
but can claim only the interest portion (not the entire amount) of the lease
payment as an expense.
Operating Lease – short-term lease, equipment returned to lessor at lease end,
lessor gives lessee the exclusive right to possess and use leased asset for a
specific period, but retains almost all risks and rewards of ownership – full
amount of lease payment is charged as an expense on the lessee’s income
statement but no associated asset or liability (other than lease payment)
appears on lessee’s balance sheet.
Sale and Leaseback – Off balance
sheet financing in which an owner sells an asset to a leasing firm and, at the
same time, lease it (as a lessee) on a long-term basis to retain exclusive
possession and use. Although this
arrangement frees capital tied up in a fixed asset, the original owner loses
depreciation and tax benefits. Also
called a leaseback.