Companies can either buy or lease assets it needs on a long-term basis. For example, a firm can buy a truck required for the business or lease the truck. A company usually leases a long-term asset if it either 1) does not have the money to buy it and 2) does not want to borrow the capital required to buy these assets. The business case should be the driver of this decision. Sometimes, companies may lease the asset because it does not have money to buy the asset or wants to avoid taking on more debt.

Accounting rules specify the conditions required to treat an operating lease as a capital lease and capitalize it. What impact does capitalizing an operating lease have on the cash flow statements?

There should be NO impact on the cash flow statements! Why is that?

There is no difference between a finance lease, a capital lease, and an operating lease on the ground. The only difference between these leases is in the way they are treated. The conditions of the lease specified in the lease agreement determine if a lease is classified as a finance lease or an operating lease.

The Microsoft Excel model can be accessed here. Feel free to change the lease numbers and see how it impacts the financial statements.