As per our text, irrespective of the legal shape of the contract, a lease is taken into account as either a rental contract or a purchase/sale coupled with financial debt funding based on the leasing program. However, I strongly think that due to the professional view that is required to distinguish between leases, it is still extremely easy to misrepresent the fact on a firm’s balance sheet.
While accounting for leases, a working lease documents no asset or liability in the fiscal reports and the sum paid is expensed when it is incurred. On the other side, a capital lease is documented as both an asset as well as a liability in the fiscal reports and usually at the existing value of the rental payments. But, persons as well as companies can and would misuse the recording of Operating and Capital Leases for their advantage.
For that reason, the FASB made up specified rules which are used in order to find out the requirements for Capital Leases. A Capital Lease is non-cancellable and one or even more of the following should be fulfilled:
The contract describes that possession of the asset moves to the lessee.
The contract has a bargain purchase option.
The lease period is equal to 75% or more of the predicted economical life of the asset.
The current value of the minimum lease payments is equal to or more than 90%
of the fair value of the leased asset (Spiceland, 2007).
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