Effect of Leases on Financial Statements for Lessors
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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. |
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