are leases on level 2? specifically classification of operating vs capital lease. i see it’s in the tiny book that schweser gives as review of level 1… probably not that hard to study/memorize, but it’s another thing in my crowded brain, and i did level 1 a long time ago.
Just having the understanding that operating leases are used to defer expenses since capital leases tend to increase expenses in the near term should suffice for Level II. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/lease.htm
ravisank, thanks very much!!!
i think its just in the FSA synthesis section…ie. how does it affect fin stmts if you reclassify from operation to capital. i don’t think we are responsible for calc’n of minimum lease payment or future lease obligation, nor do we need to know differences in what makes op’ng vs capital (though the calc’n and determination were part of Lvl 1). basically remember that reclass from cap to operating will “gross up” the balance sheet (add an asset and a liability). result: increase: int expense, dep’exp, operating income. (note decrease net income in early years as depn & interest expense greater than operating lease expense). Ratios (when capitalized vs operating): higher leverage, lower asset turnover, ROE & (early years). Finally, if we need to remember from level 1 - classify as capital based on: time greater than 75%; value greater than 90%; BPO exists.