Previous posts have discussed the difference between capital leases and operating leases for office equipment, as well as the benefits of an operating lease, which offers an off-balance-sheet financing option. However, it is important to note that the rules for properly distinguishing between on-balance-sheet financing and off-balance-sheet financing must be strictly followed. To make sure that businesses are following these accounting rules, the Financial Accounting Standards Board created a list of four conditions for when a lease must be treated as a capital lease:
1. The ownership of the equipment or asset transfers to the lessee when the lease term is over.
2. The life of the lease is longer than 75 percent of the life of the asset.
3. The current value of the lease payments (factoring in an appropriate discount rate) is greater than 90 percent of the fair market price of the asset or equipment.
4. The lessee has the option to buy the asset or equipment for a minimal price when the lease term ends.
It is important to properly determine which kind of lease you are using for your office equipment, and since these rules can be complex, it might even be wise for your business to consult an accounting or financial professional as you make these financial decisions.