Capital Lease

Important in terms of accounting, the curmudgeon of finance, a capital lease is really a bit of a deceptive irony. This rent-to-own deal is really a sale with a loan.

Let's say I need a bulldozer to put in a pool for my employees behind the factory. The lease of the bulldozer is recorded in the balance sheet as an asset, as if it was purchased, but with a loan. This means the asset (the bulldozer here) can be depreciated on the books and the interest is recorded as an expense.

The lease has to meet one (yeah, only one, not all) of the following four criteria: 1) The lease period is 75% or more than the useful life of the bulldozer; 2) At the end of the lease I can buy said bulldozer at a discounted price; 3) I will gain ownership of the bulldozer at the end of the lease period; or 4) The present value of the lease payments is greater than 90% of the bulldozer's market value. Have fun calculating that!