Depreciation of Leased Assets

In the United States, generally accepted accounting principles (GAAP) are the most authoritative accounting standards. These principles allow companies to depreciate assets acquired under a capital lease, which meets specific criteria.

Criteria

Capital leases must transfer ownership, contain a purchase option at lease end, a lease term must be at least 75 percent of the asset's useful life and the return on investment must be 90 percent or higher of the asset's fair market value. Leasehold improvements are also depreciable. These represent improvements to an existing company-owned asset.

Features

Depreciation for capital lease assets is similar to regular depreciable assets. Companies can use a number of methods, such as straight line, double declining balance or units produced to depreciate the asset. Depreciation allows the company to lower the asset's book value each month through an expense amount posted to the general ledger.

Purpose

Companies can depreciate leased assets so they do not have to expense them all at one time. The theory is that the leased item brings more value to the company than just a single accounting period. Therefore, expensing the asset over the useful life of the lease presents a more accurate financial picture.

References

• Dominican University: Accounting For Leases
• Investopedia: Leasehold Improvement