[Grizwold]

Hi sublime,

While preparing for my CFA exam in 1 week [img]/images/graemlins/ooo.gif[/img], I am expected to know how to account for leases. Therefore, my advice is mostly tailored to evaluating a firm, however I think for the most part, a lease can be treated the same for personal accounting. You may account for a lease as either an operating lease, or a capital lease. There are more incentives to account for a lease as an operating lease rather than a capital lease. If your lease does not meet any of the following criteria, you may classify it as an operating lease (which I think is most like appropriate).

1) Title to the asset is transfered to the lessee after the lease period.
2) A purchase option exists.
3) The lease period is at least 75% of the asset's economic life.
4) The present value of lease payments is greater than 90% of the fair value of the leased asset.

Most likely your car lease (and probably rented home) does not meet any of these criteria, so you should account for it as an operating lease. Your intuition is correct about your home, and your car is similar.

Think of it simply as a rental, for which you expense the payments in the period they are incurred and do not depreciate any interest/payments made on the lease. When you begin the lease, you would not add the present value of the lease to your assets. These are the primary differences between an operating lease and a capital lease. For a capital lease, you would increase your assets (annd liabilities) at the beginning of the lease, and decrease the value of the lease each period by the payment minus the interest expense. At the end of the period, the value would be zero.

Hope this helps. I can address more specific questions if you have them.

Clark