Accounting for Leases

Is your lease an operating lease or a capital lease? The magic number is 90%.

If the lease payments (less interest) add up to 90% or more of the asset’s value, then you’ve got to put it on the balance sheet as an asset. You still get to depreciate it and expense the interest, too but the lease payments go to pay down the liability. Oh, yes – you’ve got to calculate your lease liability and put that on the balance sheet, too.

If lease term is 90% or more of the asset’s estimated useful life, then same thing: capitalize.

It’s so much simpler to just expense the lease payments as an operating lease.

The rules for leases are much more complex than the above. This gives you an idea of what to look out for.

---

For my accounting reference book, I use
Wiley GAAP 2010: Interpretation and Application of Generally Accepted Accounting Principles (Wiley Gaap (Book & CD-Rom))