A capital lease is one where a lessor finances an asset while asset ownership and liability are recognized by the lessee. The lessee records capital leased assets as fixed assets and reports interest and depreciation expenses.
A lease is a capital lease when any one of these criteria are met:
The life of the lease is 75% or more of the asset's useful life
The lease contains a purchase agreement for less than market value
The lessee gains ownership at the end of the lease period
The present value of lease payments is greater than 90% of the asset's market value