Difference between revisions of "Leases"
(New page: A lease is where equipment or property is rented by one person or business from another. A lease normally implies a longer term contractual term, whereas renting is often considered to be...) |
|||
| Line 9: | Line 9: | ||
3. The non-cancellable term of the lease is more than 75% of the estimated life of the property | 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. | 4. The Net Present Value of lease payments are equal to 90% of the fair value of the property. | ||
| + | |||
| + | [[Category:Business]] | ||
| + | [[Category:Finance]] | ||
Revision as of 21:51, October 15, 2007
A lease is where equipment or property is rented by one person or business from another. A lease normally implies a longer term 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. US 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.