Accounting and Finance for Lawyers


Operating Lease

An operating lease gives the lessee the right to use some property for a period of time, but he has no ownership in or obligation for the property.

Capital Lease

A capital lease reports leased property as an asset and the payment obligations as a liability on its balance sheet.

This is not ideal as it makes one's debt ratio bigger.

Under GAAP, a lease must be reported as a capital lease if one of the following conditions is met:

  • The lessee gets ownership at the end of the lease term.
  • The lessee has the right to purchase the property for a "bargain price"—one dramatically below any possible sense of the asset's market value.
  • The lease covers at least 75% of the property's useful life.
  • The lease payments amount to at least 90% of the fair market value of the property.