What is the current version of a capital lease called?

What is the current version of a capital lease called?

• A. Finance lease
• B. Operating lease
• C. Net lease
• D. Capital lease

Answer: (A)

In current lease accounting, leases that transfer substantially all the risks and rewards of ownership to the lessee are classified as finance leases. This is the modern term for what used to be called a capital lease. The reason this fits is that such a lease is, in substance, a financed purchase of the asset: the lessee records a right-of-use asset and a lease liability, then amortizes the asset and pays interest on the liability over the lease term. If a lease doesn’t transfer those risks and rewards, it’s treated as an operating lease, which typically stays off the balance sheet (within the new framework, it still creates a right-of-use asset and a corresponding liability but is classified differently for measurement). The switch from “capital lease” to “finance lease” reflects this financing substance rather than a simple rental arrangement.

In current lease accounting, leases that transfer substantially all the risks and rewards of ownership to the lessee are classified as finance leases. This is the modern term for what used to be called a capital lease. The reason this fits is that such a lease is, in substance, a financed purchase of the asset: the lessee records a right-of-use asset and a lease liability, then amortizes the asset and pays interest on the liability over the lease term. If a lease doesn’t transfer those risks and rewards, it’s treated as an operating lease, which typically stays off the balance sheet (within the new framework, it still creates a right-of-use asset and a corresponding liability but is classified differently for measurement). The switch from “capital lease” to “finance lease” reflects this financing substance rather than a simple rental arrangement.