CAPITAL LEASE versus OPERATING LEASE

Capital Lease
The concept of the capital lease, as the name suggests, it is a capital investment that is used to lease out equipment, property or any other asset. As the name suggests, the lease contract has long term duration (i.e. a long time period of lease), high rate of rent and the principal cost of the asset that is being leased out is also quite high. The following are some important characteristics of capital lease…

·  The title of ownership is transferred from the lessor to lessee, when the time period of the lease commences.

·  The lessee has to show the depreciation of these assets in the annual profit and loss, statement.

·  In some case, where the title of ownership is not passed on to the lessee, these assets are shown on the liability side of the balance sheet.

·  Usually the term of the lease exceeds 75% of the useful estimated life time of the asset.

·  In some cases, the lease also contains a clause which enables the lessee to purchase the asset.

·  The monetary value or consideration for the lease contract is usually high and often expensive.

Heavy machinery, real estate and large sized automobiles such as buses and trucks are some examples of assets that would come under the heading of capital lease.

Operating Lease
An operating lease is a contract that rents out assets for operation. The cost of getting an operating lease is smaller and affordable, if compared to the capital lease contract. The operating lease is also for smaller assets and for shorter time duration. The following are some important characteristics of operating leases.

·  An operating lease has a shorter time duration that may stretch only for a few months.

·  The cost of obtaining such leases is often low and the total sum can be easily repaid in a few months time. Some companies tend to offer a lump sum payment to avoid repetitive transactional costs.

·  The total cost of the lease is shown only in the profit and loss statement as the title of ownership does not pass on to the lessee.

·  Usually the contract agreement of such a lease does not mention a purchase clause at the end of the term of the lease.

·  In some cases, the lessee has to pay the lessor, a monetary sum that is equal to the value of the assets, before taking over the assets. This sum is repaid to the lessee after the term of the lease gets over. This transaction is referred to as the ‘deposit’ of the lease, and is taken to ensure that the assets are not damaged beyond repair. In case if the assets get damaged, the amount of repair or replacement, is deducted from the deposit.