When analyzing a capital lease versus an operating lease, what financial characteristic is usually higher for a capital lease?

When analyzing a capital lease versus an operating lease, liabilities on the balance sheet are typically higher for a capital lease. A capital lease is treated as an asset on the balance sheet, and it results in the recognition of both an asset (the leased item) and a corresponding liability (the obligation to make lease payments). This contrasts sharply with an operating lease, where the leased asset and associated liability do not appear on the balance sheet, leading to lower reported liabilities.

The structure of a capital lease also impacts how expenses are recorded over the lease term. Unlike an operating lease, where the lease payments are generally recorded as operating expenses affecting operating income, a capital lease involves the depreciation of the asset and interest expense on the liability. In the early years of a capital lease, the depreciation and interest may lead to lower net income compared to an operating lease, but this is balanced by the treatment of the asset on the balance sheet.

Thus, the higher liabilities associated with a capital lease are a key feature that sets it apart from an operating lease, making the balance sheet reflect the full financial obligation related to the leased asset.