Question

What are the different types of lease

Answer 1

1. Financial leases or Capital leases:-

• Current GAAP rules require companies to treat leases as capital leases if:
  • Ownership of the leased asset transfers to the lessee at the end of the lease;
  • The lease contains a bargain purchase option;
  • The lease period exceeds 75% of the asset's economic life; or,
  • The present value of the lease payments exceed 90% of the asset's fair market value as at the date of lease agreement.

2. Operating leases:-

• It is just like renting. That is, if none of the 4 conditions of finance lease are met, it is operating lease (unless they specifically fall as item (3) below.

3. Sale-and-leaseback arrangements:-

• It is an arrangement in which the owner of a property sells the asset, and then leases it back from the buyer. Essentially, the transaction functions as a loan, with payments taking the form of rent.

4. Combination leases: Combination of any 2 or more of the above.