Leases

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A lease is condition whereupon equipment or property is rented by one person or business from another. A lease normally implies a longer contractual term, whereas renting is often considered to be shorter term. Hence, we rent cars for weekend trips but lease them for two years at a time.

A lessor is one who owns the asset to be leased and generates revenue from it. A lessee is the one who uses the asset and pays the owner for the privilege of doing so.

Leases usually fall into one of two categories – operating or financial. An operating lease is such that it does not transfer significant risks and benefits of ownership to the lessee. A financial or capital lease is really a loan in disguise. United States accounting rules require companies to account for a leased asset as if it were a purchase with a corresponding debt, if one of the following criteria are met:

  1. The lease transfers ownership of the property at the end of the term to the lessee.
  2. The lease contains a bargain purchase option.
  3. The non-cancellable term of the lease is more than 75% of the estimated life of the property
  4. The Net Present Value of lease payments are equal to 90% of the fair value of the property.
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