What is a defining feature of a capital lease?

A defining feature of a capital lease is that the lessee assumes ownership of the leased asset through the terms of the lease agreement. In a capital lease, the arrangement is typically structured such that the lessee effectively finances the purchase of the asset over the lease term, with the intent of acquiring ownership at the end of that period. This can be characterized by factors such as the lease duration being a significant portion of the asset's useful life, and the present value of lease payments being close to the fair market value of the asset.

In contrast, other types of leasing arrangements, like operating leases, typically do not confer ownership rights to the lessee, and the lessor retains ownership throughout the lease term. Thus, contrary to the features of a capital lease, operating leases are designed for short-term usage, allowing the lessee to utilize the asset without the long-term financial commitment that ownership entails.

The nature of capital leases reflects the intent behind them, which is to offer a financing method that treats the lease as a purchase, giving the lessee the rights and responsibilities of ownership, including potential depreciation benefits and risks associated with asset ownership.