Lease Capitalization For Financial Analysis Pt 1 Accounting Fundamentals DCF Model Explained











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In this 3-part video series, we cover the conversion of operating leases to capital leases, a process known as the “lease capitalization”. In this first video, we cover what an operating and capital lease are, how they are classified, and their impact on both the balance sheet and income statement. We also explain the related charges of a capital lease; imputed interest and depreciation. • The big reason why bankers capitalize leases centers on comparing one company to another. If Company A owns operating leases, off-balance sheet financing, and Company B owns capital leases, comparing EBITDA or EBIT multiples will be unfair. By adjusting the operating expense of an operating lease and calculating the imputed interest and depreciation associated with the present value of the liability, multiples of EBIT and EBITDA will more accurately reflect the true financial state of the company. • Definitions: • Operating Lease – Agreement which is signed for a period much shorter than the actual life of the asset while the PV of lease payments are generally much lower than the actual price of the asset. • Capital Lease – Agreement which generally lasts the entire life of the asset with the PV of lease payments covering the price of the asset. Oftentimes cannot be cancelled and has an option to buy the asset at a favorable price. • Great reading materials for topic of lease capitalization; • http://people.stern.nyu.edu/adamodar/... • If you have any other questions, please comment below. If you enjoyed the video and found it helpful, please like and subscribe to FinanceKid for more videos soon! • For those who may be interested in finance and investing, I suggest you check out my Seeking Alpha profile where I write about the market and different investment opportunities. I conduct a full analysis on companies and countries while also commenting on relevant news stories. • http://seekingalpha.com/author/robert...

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