Business
Operating Leases – The Hidden Debt
By InvestingNook  •  August 18, 2014
Firms often choose to lease long-term assets rather than buy them for many reasons – tax benefits, smaller cash outlay etc. Lease contracts create future obligations for the firm in terms of rental payments and can therefore be viewed as a form of liability in our opinion. Unfortunately, these are easily overlooked by investors due to the way they are accounted for in the books. There are two ways of accounting for leases – Capital Lease and Operating Lease.

Capital Lease

Otherwise known as a finance lease, there are a few conditions stipulating when a lease is to be classified as a capital/finance lease depending on which accounting standards the company follows. As a capital lease, the asset (usually a property) will be recorded in the balance sheets as an asset under PPE, offset by a liability corresponding to the present value of all future lease payments. The main consequence of ......
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By InvestingNook
As Co-Founder and Fund Manager of Heritage Global Capital Fund, we started InvestingNook as a website dedicated to sharing the knowledge of value investing – allowing our readers achieve an edge over the markets with the knowledge of value investing.
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