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. |
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LESSONS
- CFA Level 2: Financial Reporting Part 1 - Introduction
- Financial Reporting: Important Definitions
- FIFO and LIFO Methods for Inventory Expensing
- Inventory Accounting and Financial Statements
- Inflation/Deflation and Inventory Accounting Analysis
- LIFO – Tax and Cash Flow Note
- LIFO Reserve and Converting LIFO Net Income to FIFO Net Income
- LIFO Liquidation
- Inventory at Net Realizable Value
- Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios
- Accounting of Long-lived Assets - Expensing vs. Capitalizing
- Depreciation Methods for Property, Plant, and Equipment (PPE)
- Impact of Depreciation Method
- Depreciation - Important Points
- Impairment of Long-lived Assets
- Impact of Asset Impairment
- Revaluation of Property, Plant, & Equipment (PPE)
- Leasing versus Purchasing Assets
- Traditional Lessee Accounting in US GAAP
- Effects of Leases on Selected Financial Reporting Items for Lessees
- Lessor Accounting for Leases
- Lessors and Sales-Type Capital Leases
- Lessors and Direct Financing Capital Leases
- Effect of Leases on Financial Statements for Lessors
- Future of Lease Accounting
- CFA Level 2: Financial Reporting 1 - Recommendations
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