A capital lease involves the transfer of the ownership of the property or asset to the Lessee. As a result, the present market value of the asset is included on the balance sheet.
The lease is considered as a loan and the interest payments are expensed on the income statement. The net value of all the future payments towards the lease is the loan amount that is treated as a liability.
If the present value of the lease payments equal the property's market value, is this value considered the Lessee's cost basis?
the rules for tax purposes are different than what they are for accounting purposes. so a lease may be a capital lease under one set of rules but an operating lease under the other. it may also be possible that the lease is capital under both sets of rules but the capitalized amount may be different.
here is a discussion of bot
After much reading, it seems that the cost of the asset (cost basis) is the smaller of the fair market value of the asset OR the present value of the lease payments. This number is capitalized in the balance sheet as a ROU asset.
For example, it's possible that capitalized amount can be recalculated using the Fed's nominal interest rates as follows
Nominal Discount Rates. A forecast of nominal or market interest rates for calendar year 2021 based on the economic assumptions for the 2022 Budget is presented below. These nominal rates are to be used for discounting nominal flows, which are often encountered in lease-purchase analysis.
Nominal Interest Rates on Treasury Notes and Bonds
of Specified Maturities (in percent)
3-Year 5-Year 7-Year IO-Year 20-Year 30-Year
0.2 0.3 0.6 0.8 1.5 1.7
Why would the capitalize amount be recalculated especially if the Lessor publishes its interest rate used to calculate the lease payments?
Maybe I misunderstood.
you stated that " it may also be possible that the lease is capital under both sets of rules but the capitalized amount may be different."
I'm thinking, as a Lessee, if I know the Lessor's implicit interest rate, then I can calculate the capitalized amount. But the capitalized amount could be different under another set of rules.