Operating Leases

Unlike capital leases, which treat the leased equipment as if it were a full purchase, operating leases are treated as if the company rented the PP&E, so operating lease payments are directly expensed on the income statement when they are incurred:

  • No asset is recorded on the balance sheet.

  • No liability (lease obligations) is reported on the balance sheet.

  • Operating leases represent a type of “off-balance-sheet financing.”

  • For operating leases, lessees are required to disclose minimum annual lease payments for at least the next five years (Exhibit 6.14).

Exhibit 6.14. Minimum Lease Payments for Operating Leases are Disclosed Once a Year in the Companies’ 10-K or Annual Report
(In millions)
Year Ended June 30Amount
2006$ 230
2007204
2008167
2009122
2010 and thereafter310
 $1,033

Source: Used with permission. Microsoft 2005 Annual Report.

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