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Home > QFINANCE Dictionary > Definition of capital lease

Definition of

capital lease

Real Estate

lease treated as though leased assets were purchased a lease that is treated as though the lessee had borrowed money and bought the leased assets.

If a lease agreement does not meet any of the criteria below, the lessee treats it as an operating lease for accounting purposes. If, however, the agreement meets one of the following criteria, it is treated as a capital lease:

(i) The lease agreement transfers ownership of the assets to the lessee during the term of the lease.

(ii) The lessee can purchase the assets leased at a bargain price (also called a bargain purchase option), such as $1, at the end of the lease term.

(iii) The lease term is at least 75% of the economic life of the leased asset.

(iv) The present value of the minimum lease payments is 90% or greater of the asset's value.

Capital leases are reported by the lessee as if the assets being leased were acquired and the monthly rental payments as if they were payments of principal and interest on a debt obligation. Specifically, the lessee capitalizes the lease by recognizing an asset and a liability at the lower of the present value of the minimum lease payments or the value of the assets under lease. As the monthly rental payments are made, the corresponding liability decreases. At the same time, the leased asset is depreciated in a manner that is consistent with other owned assets having the same use and economic life.

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Definitions of ’capital lease’ and meaning of ’capital lease’ are from the book publication, QFINANCE – The Ultimate Resource, © 2009 Bloomsbury Information Ltd. Find definitions for ’capital lease’ and other financial terms with our online QFINANCE Financial Dictionary.

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