The applicable financing structures involve:
Financing leases
A finance lease is a contract that allows the lessor as owner,
to retain ownership of an asset while transferring substantially
all risks and rewards to the lessee.
A lease that meets one of the following criteria is called a
Finance or Capital lease:
| (a) | By the end of the lease period term, ownership of the leased property is transferred to the lessee. |
| (b) | The lease contains a 'bargain basement' purchase option. |
| (c) | The lease term is 75% or more equal to the estimated useful life of the leased property. |
| (d) | At start of the lease, the present value of the minimum lease payments is 90% or more of the fair market value of the leased equipment. |
Operating Leases
In an operating lease, the risks and rewards associated with ownership of the leased equipment are substantially borne by the lessor. An operating lease usually involves the lessee paying a rental for the hire of equipment for a period of time, which is substantially less than its economical useful life. The lessor effectively retains a significant amount of the risks and rewards of ownership of the equipment.
As there is no transfer of ownership, the asset remains on the lessor's balance sheet and is depreciated over its estimated useful life to a set residual value. For lessees the lease is not included in the balance sheet and usually only summarised in the note to the financial statements