Question

The principles regarding leases were recently updated by FASB as discussed in the textbook. Explain two main differences between capital and operating leases. Using a public company different from your project, locate the lease disclosures in the notes to the financial statements. Identify the types of leases the company has and explain how you can tell which types of leases are used. Participate in follow-up discussion by comparing the lease reporting of your company to that of a classmate's company and comment on any similarities or differences between the companies.

Answer 1

As per new FASB for leasing:
Definition of Lease: A lease is a contract, which conveys the right to control the use of the
asset(Property, Plant or Equipment) for a specified period of time in exchange for
consideration.
Lease are of two type Capital Lease and Operating Lease.
Lease would be classified as Capital Lease when:
1. Lease contract transfer the ownership of underlying asset to the lessee by the end of the lease term.
2. Lease contract grants the option to purchase the underlying asset.
3. Lease term is for the major economic useful life of the asset.
4. Present Value of the lease payments is equal to or exceeds the fair market value of the
underlying asset.
5. Lease asset is of specialized nature which certainly do not have any alternative use at the
end of lease term.
Lease would be considered as operating lease when:
1. Ownership of the asset is retained by the lessor during and after the lease period.
2. In this there is no option of purchasing the asset.
3. Lease term is for less period of time and does not cover the major economic life of the asset
4. There is only the right to use the asset, all the risk and benefits remain with the lessor.
	Major Difference between Operating and Capital Lease
	Capital Lease	Operating Lease
Accounting	Lease Asset is considered as asset	Since there is no ownership of the
	in the books and lease payments as	underlying asset, payments are
	liabilities. Payments made are	considered as operating expense
	recorded in the balance sheet.	and is show in Profit and Loss
		Statement.
Tax	Lessee is considered to be the	Lease is for the renting of the asset
	owner of the asset therefore claim	and therefore lease payments are
	depreciation expense and interest	recorded as rental expense in the
	expense.	P&L statement.

with the help of the above information you can easily differentiate between operating and capital lease.