Compared to a firm with a capital lease,operating leases help the lessee firm earn a higher return on assets in the early years of the lease.

Question

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In an operating lease, the lessee does not consider the leased asset as part of their balance sheet, thus the accounting treatment emphasizes on the rental expense. As a result, the asset being leased is not recorded as an asset and the liability is not reflected as debt, giving the firm a higher ROA (return on assets) in the early years of the lease. In contrast, in a capital lease, both the asset and liability are recorded on the balance sheet, which reduces the ROA of the firm.

Compared to a Firm with a Capital Lease,operating Leases Help