Week 4. Operating and Capital Leases Off-Balance Sheet Debt

IFRS Capital (Finance) Leases

Leases greater than one year

GAAP Capital (Finance) Leases 1)

1) Lease term is greater than 75% of asset’s estimated economic life

GAAP Capital (Finance) Leases 2)

2) Lease contains an option to purchase for less than fair market value

GAAP Capital (Finance) Leases 3)

Ownership of asset is transferred to the lessee at end of lease term

GAAP Capital (Finance) Leases 4)

Present value of lease exceeds 90% of the fair market value of asset

Operating Leases

A lease for which the lessee acquires the property for only a small portion of its useful life

Process for Capitalizing Leases

1) Reorganize the financial statements
2) Build a WACC
3) Value the enterprise