Question

What is your view on this? Please see below. No internet sources.

Capital leases, under the old standards, were long-term liabilities. The new leases standards effectively have made almost all leases capital leases. The reason many government chose the leasing route under the old standards was because they could not borrow traditionally to acquire the assets they needed, perhaps because borrowing required voter approval, or because they were close to their statutory borrowing limit. With a lease, they could structure the terms to qualify as operating leases and, therefore, not have to report a long-term liability. Even when they had capital leases, those liabilities generally were not included in the calculation of borrowing limits.

One of the reasons why leasing might be better than borrowing to own is that a government does not want to incur the costs of ownership, such as storage, maintenance, and disposal. Some school districts, for instance, own their bus fleet, but others lease the buses and the lessor also maintains and repairs the buses. When a bus becomes too old for appropriate use, the lessor replaces the bus. The district does not have to employ a staff to take care of purchasing, maintaining, replacing, and so on. I think this is relevant for many equipment leases, such as printers, copiers, and other office equipment.

Answer 1

In my view, the explanation above is quite good, but it is lacking some formation error.The thoughts could be assembled more efficiently.It can be provided with the introduction part and even with a good conclusion else it is very good as it is supported with examples.

A capital lease refers to a lease contract that gives the right of ownership to the lessee by the lessor at the end of the lease term. he owner of the leased asset is the lessor, the one who uses the leased asset upon one time or periodic payment to the lessor is called lessee.

In another way,we can say that, a capital lease is a lease agreement in which the lessor purchases the asset bu transfers all the risks, rights and awards associated with the asset to the lessee against one time or periodic payment.

Four conditions to qualify for a capital lease

The lease period must be equal to 75% or above then the estimated life of an asset.

The lease contract must have an option of bargaining for the price less than the market value of an asset to be purchased.

The ownership of the leased asset is transferred to the lessee at the completion of the lease term from the lessor.

The present value of the lease payments should be more than 90% of the current market value of the leased asset.