- Lessor use of finance (capital) leases
- Lessee use of operating leases
Not understanding why these are issues?
Nobody shows an asset on their balance sheet.
So when lessor uses capital lease - they remove the asset from their balance sheet. In what case would this be a bad thing? Is it just to manage volatility in the balance sheet?
To clarify my previous question, I understand decreasing assets is a bad thing, but why would management want this?
Because they also remove a liability. It lowers their debt-to-equity ratio, for example. And it increases their ROA, as another example.
In case of capital lease, isn’t lessor required to book a lease receivable, which is reduced over time by lessee’s principal payments?
So would the lease receivable = the asset value that was previously removed? Decrease with each principal payment, and interest recorded as revenue?
That was my understanding from Level 1, based on this example from the CFAI text:
