Question

Does it matter if capital leases are reported in a footnote or in the body of the balance sheet? what research evidence exists to help evaluate this question?

Answer 1

Capital Lease is an arrangement where the lessor gives an asset to the lessee. For Lessor, Lease Installment is a Receivable item on the balance sheet, and for Lessee, Lease installment is an obligation to pay(Liability). Also, Leesee records Asset in his financial statement and also claim depreciation on the same.

Thus For both the parties Lease Transaction is an important element of there financial statements so it must be reported on the body of the balance sheet, disclosing in a footnote is not appropriate as it will make financial statement materially misstated.

Hope the explanation stated helps you understand the importance of Capital Lease transaction. In an Operating Lease, the presentation on the face of the balance sheet will be different as compared to Capital Lease.