An operating lease is a lease, which does not meet any of the criteria to be classified as a capital lease. Operating leases are expensed rather than capitalized. If the operating lease agreement requires lease payments to be made on a level-payment basis, expense/expenditures for operating leases should be recognized as they accrue over the lease term and should be measured in accordance with the terms of the lease agreement. Since this treatment is essentially that of a rental contract, the lessee does not record an asset or a related liability for the future required lease payments on its balance sheet. Instead, the lessee records an annual rental expense on its income statement. Although both the IAS 17 and the FAS 13 have the same objective: to establish appropriate, standardized accounting and disclosure requirements for lessees and lessors, to apply to leases, there are a few distinctions between the two. SFAS 13 provides 4 criteria to classify a capital lease, which are:
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