Quick Question on Lease Accounting net, all, regarding, something, payments

ashycal

Hi all,
I just had a quick question on net income for operating v. finance leases. I am pretty clear on all the financial statement impacts of the two except for one very basic subject: net income.
Why is net income lower in earlier years for for a finance lease? Am I simply overlooking something regarding the CFO/CFF split on payments for this type of lease? Any clarification is much appreciated, thanks!
Greg

cyber21

the logic is correct bt its due to a sum of both depriciation and interest exp on income statement which makes net income smaller in earlier years compared to operating lease and not the interest and principal payments…principal payment is never reflected on income statement, its an outflow frm cff and reduces the lease liability on balance sheet…hope i am correct here…

smartpants

Yep, very simple as I thought.
Thanks a lot!

smartpants

An operating lease has a fixed lease payment. A finance lease is made up of interest and principal repayment. At the beginning of the lease, the interest and principal repayment is higher than the amount of the least payment. As the value of the underlying asset becomes amortized (smaller) over time, you pay less and less interest on it. Therefore in later years, your interest expense is smaller than the lease payment on an operating lease would be. Hence smaller NI in the beginning and larger NI in the later years for a finance lease.