Effect of Leases on Financial Statements for Lessors

The table below summarizes the effects of operating, sales type capital leases, and direct financing capital lease on financial statements for lessor firms at lease initiation.

ITEM	OPERATING LEASE	SALES TYPE CAPITAL LEASE	DIRECT FINANCE CAPITAL LEASE
Asset size on balance sheet at initiation.	No change because no asset is recorded.	Increase because the investment in lease asset is larger than the reduction to inventory.	No change because the investment in lease asset is equal to the reduction to PPE.
Income during year of lease initiation.	No change because no gain on sale is recognized.	Higher than an operating or direct finance capital lease because lessor recognizes a gain on the sale.	Higher than an operating or direct finance capital lease because lessor recognizes a gain on the sale.
Operating cash flow impact upon lease initiation.	No impact, as no cash changes hand on initiation.	Higher than the other two methods; while no cash may change hands at lease initiation, the lessor will recognize a gross profit on the “sale” of the asset, but this is offset by an outflow to investing cash flows for the investment in leased asset.	No impact, as no cash changes hands on initiation.

The table below summarizes the effects of operating, sales type capital leases, and direct financing capital lease on financial statements for lessor firms at lease initiation.

ITEM	OPERATING LEASE	SALES TYPE CAPITAL LEASE	DIRECT FINANCE CAPITAL LEASE
Asset size on balance sheet at initiation.	No change because no asset is recorded.	Increase because the investment in lease asset is larger than the reduction to inventory.	No change because the investment in lease asset is equal to the reduction to PPE.
Income during year of lease initiation.	No change because no gain on sale is recognized.	Higher than an operating or direct finance capital lease because lessor recognizes a gain on the sale.	Higher than an operating or direct finance capital lease because lessor recognizes a gain on the sale.
Operating cash flow impact upon lease initiation.	No impact, as no cash changes hand on initiation.	Higher than the other two methods; while no cash may change hands at lease initiation, the lessor will recognize a gross profit on the “sale” of the asset, but this is offset by an outflow to investing cash flows for the investment in leased asset.	No impact, as no cash changes hands on initiation.