Future operating lease payments

CFA Level I FRA
#1

Kaplan says that Future operating lease payments are not their on balance sheet. I am assuming this is a lease payment in advance, just as we do with car insurances. However, isn’t “prepaid expense” also there on the balance sheet? Why this type of activity is not on the balance sheet?

Any help please ?

Thanks

#2

For capital leases, you record an asset on the balance sheet, and a liability on the balance sheet (both equal to the present value of the future lease payments). For operating leases, you record nothing on the balance sheet: no asset, no liability.

#3

Thanks for your reply, S2000magician. I am a beginner, and not really sure about leases. I have just read BS, CF and Income statement. However I did go through the table of contents. I believe operating leases are covered in Reading #32. Right? I am sorry, if my question is really basic.

Thanks again.

#4

I haven’t gotten the 2014 curriculum yet, so I don’t know which reading for certain, but they’re in there.

In a nutshell, a capital lease is really a purchase on credit. You put the asset on your books (which you can then depreciate), and you record a liability for the future payments; your payments will be part interest, and part principle. An operating lease is a rental. The asset isn’t yours, you just get to use it for a while. You don’t record an asset or a liability, and you don’t get to depreciate the asset; your payments are just rent.

#5

Thanks S2000magician!

#6

My pleasure.