What are the effect of the operating and capital lease methods on the financial statements of the lessor?
EFFECT OF THE OPERATING AND CAPITAL LEASE METHODS ON THE FINANCIAL STATEMENTS OF THE LESSOR
Both assets and liabilities increase for a lessee using the capital lease method as compared to the operating lease method. For a lessor, however, either the leased asset (operating lease method) or a lease receivable (capital lease method) appears on the balance sheet. The amount in the Lease Receivable account exceeds the amount in the Equipment account by the gross margin (that is, sales minus cost of goods sold) recognized by the lessor from the "sale" of the lease asset. The balance sheet effects of the operating and capital lease methods do not differ as much for lessors as they do for lessees.
The effects of the operating versus capital lease methods on the income statement of the lessor are more pronounced. The lessor recognizes a gross margin from the "sale" of the leased asset at the time of signing the lease and then recognizes interest revenue over the life of the lease.
Although lessors tend to prefer recognizing income from the "sale" of the asset at the time of signing under the capital lease method, they recognize the preferences of lessees to structure leases as operating leases. Because the lessor and lessee apply the same criteria to classify leases as either an operating lease or a capital lease, lessors tend to accommodate the preferences of lessees, their customers, but set rental payments to compensate for any additional risk the lessor bears.
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