What characterizes a Capital Lease?

A capital lease is characterized by an arrangement where the lessee acquires the benefits and risks of ownership of the asset, even though legal ownership remains with the lessor. This type of lease typically involves a substantial commitment from the lessee in terms of payments over the lease term, rather than requiring a low initial outlay.

One of the defining attributes of a capital lease is that it generally involves installment payments spread over a longer term, which makes it similar to financing the purchase of an asset. These payments are usually structured so that they cover not just the depreciation of the asset but also any interest or financing charges associated with it.

In capital leases, the lessee practices capitalization, meaning that the asset is recorded on their balance sheet, reflecting their investment in the leased property. This characteristic distinguishes capital leases from operating leases, which do not allow the lessee to capitalize on the asset and typically involve lower payment amounts with different financial implications.

Other options listed do not adequately encapsulate the specific nature of a capital lease. While payment terms exceeding 12 months are common in capital leases, this is not definitive of their classification. A capital lease can indeed require options for purchase, which distinguishes it from some other leasing arrangements. Finally, direct purchase of