- A capital lease is considered financing of an asset in substance, even if not in legal form, as it transfers substantially all the risks and rewards of asset ownership to the lessee. An operating lease does not.
- Under a capital lease, the asset and liability are recorded on the lessee's balance sheet. With an operating lease, the asset remains on the lessor's balance sheet and the lessee records lease payments as rent expense.
- Some factors that determine if a lease is a capital lease include transfer of ownership, bargain purchase option, lease term compared to asset life, and present value of minimum lease payments