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Are leases off balance sheet activities? If so, what type of leases?



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Yes, operating ("FAS 13") leases are off balance sheet activities. The leased equipment is kept on the lessor's balance sheet in this case, and the lessee books only the rental expense. There are several rules in US GAAP that determine if a lease transaction is an operating lease or not.

Main characteristics of an operating lease:
- it is cancelable,
- its period is shorter than the economic life of the asset (usually shorter than 75%)
- the lessor takes back the equipment after the lease term
- the lessor retains the ownership of the asset.

The other type of leases is called capital lease. It is classified as a purchase, the leased assets have to be shown in the lessee's balance sheet as fixed assets. In case of a capital lease the contract contains an option to purchase the equipment for less than its fair market value at the end of lease term.

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