Lease Capitalization create an equal amount of asset and liability to the Balance sheet. The CFA textbook states that “Lease capitalization adds both current and non-current liabilities to debt, resulting in a corresponding decrease in working capital and increases in the debt-to-equity and other leverage ratios” The thing I dont understand is how come working capital is decreased. -Working Capital = CA - CL Since Lease Capitalization increase both Asset and Liability, there should be no change to working capital… Same goes for current ratio (CA/CL), i dont understand why current ratio is lower for lease capitalization… thank in advance
Ahh, but you have to be careful here. When measuring working capital, we’re referring to CURRENT assets and CURRENT liabilities. Capitalized leases are added to your assets. However, would you classify that as a current asset? On the other hand, part of the matching liability is current, since the lease payment you make this year is, in part, amortizing away the lease balance.
excellent point gdiddy. thanks for the clarifcation
Thanks again gdiddy… so can i say that most Asset created by lease capitalization are non-current??
Quantum58 Wrote: ------------------------------------------------------- > Thanks again gdiddy… > > so can i say that most Asset created by lease > capitalization are non-current?? ------------------------------------------------------- when capitalizing an asset, it will be long-term asset in B/S. no matter it is accquired by purchase or lease.
hi annexguy thanks for the answer 