Financial Terms Glossary

Capital Lease

Formal

A lease (see separate definition) is a Capital Lease if:- a) Lessee owns property at end of lease OR b) Lease term is greater than 75% of economic life of the asset OR c) Net Present Value of rental and lease payment is greater than 90% of its fair market value. Reported 'On Balance Sheet'.

Informal

Assets can either be owned or rented/leased. Some companies entered into rental contracts simply because the accounting rules allowed them to exclude rented assets from their Balance Sheet - and make some of the key performance measures look a lot better than they were in reality! Capital Lease is a term for a rental/lease contract that is so similar to owning the asset outright that it states it must be disclosed that way by all the accountants in suits. So, no more cheating.

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