Capital Leases

A capital lease is essentially the same thing as a sale of an expensive item financed by the seller, only instead of the note payable (promissory note), the buyer (the lessee) signs the long-term lease contract.

Such an agreement stipulates that in which the lessor only finances the lease, and all other rights of ownership transfer to the lessee, resulting in the recording of the asset as the lessee's property in its general ledger. This property shows up in Capital Lease account on the balance sheet of the lessee.

The lessee can only record the interest portion of a capital lease payment as expense, as opposed to the amount of the entire lease payment in the case of an operational lease. The latter, however, needs to be disclosed in the footnotes to financial statements anyway (I will cover operating leases in the section of Off Balance Sheet Financing).

Therefore, the only issue regarding capital leases is the choice between structuring the purchase as a straight purchase or a capital lease. Which means that you will have to build a financial model for each option and choose the one that yields higher NPV and IRR values.