FSA: capitalize lease liability, increase, usually, adjust, income

meghanjackson

usually prefer operating lease than capitalize it, if capitalize it, will increase liability and asset the same, but increase net income.
if keep it as operating lease, then it will reduce net income. is that right?
when see a footnote on B/S and I/S, how should we adjust it? Thanks.

Londonrocks

yes, BaySt. is correct, remember an operating lease is just a rental, while a capital lease you actually own the CAPITAL ASSET (think longterm). Companies love operating leases b/c they are off balance sheet so they improve leverage ratios.

dotamasta

I am reading on this topic as well and have some question as well. Can you please elaborate on how finance lease lowers the current ratio, working capital, and leverage?
For current ratio, is it because finance lease is recorded as PP&E whereas the liability is in current liability? Thus, CA/CL is lowered? I guess that same logic applies for Working capital right?
As for leverage, how does debt/assets change when we are inputting asset/liability by the same amount to begin w/?
Please help, thank you!

d2rockstar

I think I might have figured this out, it’s because there’s a liability (long term debt) plus a current liability (lease obligation for the period). Is that right guys?

stalkey

Re debt/assets ratio, this is a tricky one because a finance lease will affect numerator AND denominator….however the % change to debt is normally higher (because companies normally have less debt than assets) so you would expect the ratio to typically get higher (ie, worse). hope that helps

hanvinh

makes sense. thank you very much Kiakaha.

LokiDog2

finance/capital leases do not lower leverage, they increase it