Operating lease capitalization

Please clarify, why for balance adjustment purposes we should capitalize operating lease??? This is Op lease not cap lease. Leasee just periodically have to charge op lease expenses - and that’s all!!

You don’t do this to ALL operating leases. Notice that if a company leases an apartment for a relocating employee for 2 months, that’s a valid operating lease. If a company leases a building for 999 years (nice move Aurthur Guinness), you can call it an operating lease, but it behaves an awful lot like a capital lease because: - It represents a future obligation of rent payments (a liability) - It represents the future use of some piece of property which will presumably help the company earn a return (an asset)

bcos an operating lease is off balance sheet. when it comes on the balance sheet thro; the adjustments process - both an asset and a liability are brought on the balance sheet. rental expense on the income statement is removed, replaced by additional depreciation expense + interest expense. this reduces the NI in the initial portions of the lease life - bcos depr + int expense > rent expense. so ROA, ROE would be affected. Assets and liabilities increase - so Debt / Equity Leverage would change. this makes a lot of difference to how you might potentially view the company during your valuations.