What is a Capital Lease?

Capital lease is a lease form divided from the perspective of lessee accounting. According to the "Statement of Financ-ial Accounting Standards No. 13: Accounting of Lease" issued by the United States in 1976, leases are divided into capital leases and operations according to the purpose of lessee accounting. lease. Where the lease contract meets one or more of the following conditions on the lease start date, it is a capital lease and should be treated in accordance with the accounting method of capital lease, that is, the leased asset is capitalized: After the lease term expires, the ownership of the leased asset is transferred It belongs to the lessee; The contract stipulates that the lessee has the option to purchase the leased asset at a low price; The lease period (including the option to renew the contract) is equal to or greater than 75% of the expected life of the leased asset; On the day, the value of the minimum rent payment (except the management costs borne by the lessor) during the lease period is at least equal to or more than 90% of the fair value of the leased asset. Those who cannot meet one of the four conditions listed above are classified as operating leases. In addition, on the lease start date, leases in which the leased property has been used for more than 75% of its useful life are also treated as operating leases and cannot be capitalized. The rent paid for each period shall be directly expensed. ^[1]

Capital lease

Right!

Capital lease is a lease form divided from the perspective of lessee accounting. According to the "Statement of Financ-ial Accounting Standards No. 13: Accounting of Lease" issued by the United States in 1976, leases are divided into capital leases and operations according to the purpose of lessee accounting. lease. Where the lease contract meets one or more of the following conditions on the lease start date, it is a capital lease and should be treated in accordance with the accounting method of capital lease, that is, the leased asset is capitalized: After the lease term expires, the ownership of the leased asset is transferred It belongs to the lessee; The contract stipulates that the lessee has the option to purchase the leased asset at a low price; The lease period (including the option to renew the contract) is equal to or greater than 75% of the expected life of the leased asset; On the day, the value of the minimum rent payment (except the management costs borne by the lessor) during the lease period is at least equal to or more than 90% of the fair value of the leased asset. Those who cannot meet one of the four conditions listed above are classified as operating leases. In addition, on the lease start date, leases in which the leased property has been used for more than 75% of its useful life are also treated as operating leases and cannot be capitalized. The rent paid for each period shall be directly expensed. ^[1]

From the tenant's perspective,

About Capital

Advantages : 1. Increase the speed and flexibility of fundraising; 2. Avoid the risk of obsolete equipment; 3. 3. Lightening the burden of repaying dues; 4. Enhance the enterprise's ability to flow; Reduce and smooth costs; 6. Leasing provides a new source of funding and is 100% funded.

Disadvantages : 1. 1. The cost of capital for lease financing is high; 2. Loss of residual value of assets; The lessee cannot use the leased assets as collateral for other loans; 4. Difficult to improve assets; 5. May result in reduced operating efficiency for lessees.