Professional Documents
Culture Documents
Leveraged leases are most often used in the renting of assets planned for
short-term use. Assets like cars, trucks, construction vehicles and
business equipment are typically all available through the option of
leveraged leasing. Leasing in general means a company or individual will
be renting an asset.
Leasing any type of asset gives an entity the right to use the asset for a
short-term. In general, the entity is only renting the asset although
many leveraged leases offer a buyout option at the end of the lease term.
Accounting standards require a business to differentiate and account for
leased assets differently depending on whether the lease is an operating
lease or leveraged/capital lease.
Once a leveraged lease is approved and agreed on, the borrower takes
possession of the asset and is responsible for making regularly scheduled
payments toward the loan balance. The asset’s title is usually held by
either the lessor or the lender depending on the structure. Regardless, a
leveraged lease doesn’t involve the transfer of the title to the lessee during
the lease period.
Leveraged leasing and leveraged financing are typically the two main
options for any person or company buying a car or other high-value asset.
A leveraged lease provides a loan that covers an estimated value of a car
over the leasing timeframe. Leveraged lease payments can potentially be
lower because the loan does not cover the full value of the car.
An entity can also have the option to finance a car, in this scenario the car
loan is similar to a home loan. The buyer of the car obtains a loan for the
full value of the car and payments are created over a longer timeframe for
repaying the car loan.
KEY TAKEAWAYS
If any one of these criteria is met, then the lease is considered a capital
lease and if not then the lease is considered an operating lease. Capital
leases generally involve accounting for the leased asset similarly to an
asset purchase. Operating lease accounting will generally require entries
for the lease payments as operating expenses.