capitalize operating lease

will that impact Net Income? if so, through which item? Thanks.

crap, that’s L1 stuff. digging deep from the well- isn’t NI earlier on lower (b/c you have higher depreciation), but later on NI is higher when you capitalize. sound right?

bannisja Wrote: ------------------------------------------------------- > crap, that’s L1 stuff. digging deep from the > well- isn’t NI earlier on lower (b/c you have > higher depreciation), but later on NI is higher > when you capitalize. > > sound right? Sounds right, depreciation and interest will be high in early years and will taper off in later years.

That’s sounds familar. When you capitalize the lease, you are replacing annual rental expense with depreciation and interest. It will vary with the depreciation method you put out there, but generally you’ll have higher expense in the early years (depreciation and interest expense), but it will go down in later years (the interest expense is calculated as a percentage of the remain asset value not year depreciated… is that right?). Net impact in the end is 0, however.

nice work team. i wish i were taking the L1 not L2 test on saturday… ahh the good old days. so much easier then.

Didn’t seem so at the time, but sure does now!

well depreciation is the same assuming you are using straight line, but interest does go down later on as your capitalized lease decreases with payments being made. Over the life of the lease there is no effect tho, both will have the same total NI.

i think capital lease will enhance earning quality by having a lower earning, because interest + depreciation is greater operating lease expense

Capital leases are one of the fundamental CFA “YOU MUST DO THIS” items for earnings quality. It’s hammered home again and again and again. The big thing is getting all the possible assets and liabilities on the balance sheet.