Glossary of Terms

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Capital Lease

A lease accounting concept under Financial Accounting Standard No. 13 (FAS 13) and not a legal concept. In accounting parlance, a lease should be classified and accounted for by a lessee as a purchase and by the finance company, or lessor, as a sale or financing, if it meets any one of the following criteria: (a) the lessor transfers ownership to the lessee at the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life) or (d) the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset. A lease that fails all of these criteria is an operating lease for accounting purposes. (Courtesy www.elfaonline.org)

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