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Capital Lease
Practical Law Glossary Item 0-382-3306 (Approx. 2 pages)
Glossary
Capital Lease
Functionally a financing transaction (an asset is acquired and a liability is incurred). A lease is a capital lease under GAAP if the characteristics of ownership pass from the lessor to the lessee or the lessee is compelled to purchase the asset that is being leased. Characteristics of capital leases include:
- Term of the lease is greater than 75% of the asset's estimated economic life.
- The lease includes an option to purchase the asset for less than fair market value.
- Ownership of the asset is transferred to the lessee at the end of the lease term.
- The present value of the lease payments exceeds 90% of the fair market value of the asset.