Nature of Leases
Conceptual Nature of Leases--Schools of Thought:
- Do not capitalize leased assets. Since title has not passed this is a rental agreement only.
- Capitalize all leases If asset is used by lessee it should be recorded as an asset with a corresponding liability.
- Capitalize leases where there is a penalty for non-performance (substantial) This is clearly a future obligation and should be recorded as such.
- **Capitalize leases which are similar to installment sales. Since the substance of a lease resembles an installment sale the treatment should be consistent.
**FASB approached the problem according to the last school of thought. Substance over form, consistency.