From the course: Accounting Foundations: Leases
Join today to access over 25,200 courses taught by industry experts.
Operating lease versus capital/finance lease
From the course: Accounting Foundations: Leases
Operating lease versus capital/finance lease
- Now, isn't there a vast difference between an operating lease and a capital, or finance, lease? No. Based on the four lease classification criteria, the difference between a lease classified as operating and a lease classified as capital or finance can be almost nothing. To illustrate, let's look at Company T's leases. The lease contracts last for 10 years, and the assets themselves are assumed to have a useful life of 14 years. 10 years divided by 14 years is 71%, which is less than the 75% threshold in the lease classification criteria. So, these classified as operating leases. But what if the leased assets were assumed to have a useful life of 13 years instead of 14 years? 10 years divided by 13 years is 77%, which is greater than the 75% threshold in the lease classification criteria. So, these lease would have to be classified as capital/finance leases. Now, think about that for a moment. In this example, the entire issue of classification of these…
Practice while you learn with exercise files
Download the files the instructor uses to teach the course. Follow along and learn by watching, listening and practicing.
Download courses and learn on the go
Watch courses on your mobile device without an internet connection. Download courses using your iOS or Android LinkedIn Learning app.