Diagram Footnote Lease For Free

GAAP views a capital lease more like a long-term loan, or ownership. The asset is treated as being owned by the lessee and is recorded on the balance sheet. Capital leases are counted as debt.

The lessor reports the lease as a leased asset on the balance sheet and individual lease payments as income on the income and cash flow statements. The lessee reports the lease as both an asset and a liability on the balance sheet due to their stake as a potential owner of the asset and their required payment.

Under a capital lease, the leased asset is treated for accounting purposes as if it were actually owned by the lessee and is recorded on the balance sheet as such.

Enterprise value (or total invested capital) includes common and preferred equity and interest-bearing debt. Equity values should not change but, when operating lease liabilities are considered, enterprise values of companies will be expanded to include additional debt.

The cost of leasing may differ from that for other sources of debt. If so, then leasing should be a separate component of the WACC calculation. However, in many cases it is sufficient to use a single average cost of debt, in which case combine lease obligations with other debt finance.

The lessor reports the lease as a leased asset on the balance sheet and individual lease payments as income on the income and cash flow statements. The lessee reports the lease as both an asset and a liability on the balance sheet due to their stake as a potential owner of the asset and their required payment.

Lease payments. As the company receives lease invoices from the lessor, record a portion of each invoice as interest expense and use the remainder to reduce the balance in the capital lease liability account. Eventually, this means that the balance in the capital lease liability account should be brought down to zero.