How Lessors Report Capital Leases Classified as Direct Financing

Capital leases are treated by the lessee as though the asset was purchased and financed by the seller. For the lessor, however, the accounting treatment depends on whether the lease is classified as direct financing or as a sales-type lease.

If the present value of future lease payments is equal to the asset’s cost (i.e. there is no profit) the lease is treated as direct financing, and the income statement treatment is financing in nature (interest revenue.) The value of the asset will not be inculded as a “sale,” nor would there be a related cost of goods sold.

On the balance sheet, the value of the asset is eliminated, and replaced by a lease receivable of equal value.

For more information, see all articles on: Accounting, Financial Statement Analysis, Fundamental Analysis, Ratio Analysis

See also:
  • How Lessors Report Capital Leases Classified as Sales-Type Leases
  • How Lessors Report Operating Leases
  • Why Do Companies Use Operating Leases?
  • Accounting for Leases: Operating versus Capital Leases
  • Economic Value Added (EVA)
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