A capital lease is a contract entitling a renter to the temporary use of an asset, and such a lease has the economic characteristics of asset ownership for accounting purposes. The capital lease requires a renter to book assets and liabilities associated with the lease if the rental contract meets specific requirements. In essence, a capital lease is considered a purchase of an asset, while an operating lease is handled as a true lease under U.S. generally accepted accounting principles (GAAP).
In 2016, the Financial Accounting Standards Board (FASB) made an amendment to its accounting rules requiring companies to capitalize all leases with contract terms above one year on their financial statements; it is effective Dec. 15, 2018, for public companies, and Dec. 15, 2019, for private companies.
Even though a capital lease is a rental agreement, GAAP views it as a purchase of assets if certain criteria are met. Unlike operating leases that do not affect a company’s balance sheet, capital leases can have an impact on companies’ financial statements, influencing interest expense, depreciation expense, assets and liabilities.