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In a capital lease, the lessee is considered the owner of the equipment. Classification Criteria FASB The Financial Accounting Standards Board (FASB) sets the criteria for classifying leases and the rules for reporting leases in a firm’s financial statements. FASB Statement 13 - Accounting for Leases (FASB 13) contains the accounting rules for lease transactions. The main goal of the criteria is to establish who, in substance, owns the equipment. DRAFT V01/11/96 P12/03/99 FINANCIAL REPORTING AND TAX CLASSIFICATIONS 2-3 The lessee and the lessor apply the criteria independently.

The amount of the monthly lease payment often falls within their spending authority guidelines. Cash Management Affordability Since leasing equipment is often more affordable than purchasing equipment, many companies choose this option as new and more advanced (and more expensive) equipment becomes available in the marketplace. Let’s examine some of the cash management benefits. Lower Down Payments Up-front costs v01/11/96 p12/3/99 Generally, leasing companies require lower down payments than financial institutions.

SUMMARY In this section, you learned that there are many important reasons lessees choose to lease equipment. These include the following: n Guarding against technological obsolescence n Financial reporting v01/11/96 p12/3/99 DRAFT 1-24 UNDERSTANDING THE LEASING INDUSTRY n Cash management n Income tax motivations n Ownership considerations n Flexibility and convenience n Economics Some of the reasons can be a single source of motivation for a company to lease. In other cases, it is the combined benefits of leasing that influence a company to lease.

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