now let's talk about one conceptual issue that is often time debated in lease accounting that is should we treat the least equipment and asset on the balance sheet which is called capitalization so should we put the least equipment as a asset just like the asset we purchased this is a debate of substance and form so in in terms of substance we do receive the right to use the asset just as the any of the purchased asset we have so in terms of substance we should consider capitalize the least asset least equipment that means we put that on the balance sheet however in terms of form the least equipment we do not have ownership and the Le C we do not receive ownership therefore some might argue we should not capitalize the lease that means to not put it on the balance sheet and a type of asset most people in accounting would agree that capitalization is a correct way to treat leases but even so how to treat the leases how to capitalize there are different ways to do that so the fast B has adopted the third approach basically so we should capitalize all long term leases so anything that's larger than one year the lease term is larger than one year we should treat the equipment as a long-term asset on our balance sheet other than that will will not capitalize meaning will not be putting that on the balance sheet now that is for leas equipment there are also questions regarding lease payments so lease payments are future Financial obligations that you have to pay during the current accounting periods and a foreseeable future based on the contract now one treatment of this is to report only the current portion and expenses and ignore the future period lease payments however as we are capitalizing the least assets to keep it conceptually consistent we have to also treat lease payment we have to also capitalize the lease payments so we're treating that as liabilities on the balance sheet so as we have least assets on the balance sheet we'll have least liability on the balance sheet as well another issue regarding lease is the classification of lease es so companies typically classify leas Arrangement as either Finance lease or operating lease so either Finance or operating in either case company will capitalize all least assets and liabilities so we have talked about this before so we have to capitalize the assets and liabilities no matter what's the case for a finance lease the leas recognize interest expense on the lease liability over the life of the lease using effective lease uh effective interest method we'll be talking about that in just a second and the LEC also reords ammortization expense on the asset on a street light basis so that's for finance lease however if the lease is classified as operating then the Le c will also measure interest expense using effective interest method so this is the same however the Le amortize the rate of the asset such that the total lease expense is the same from period to period so for the lease expense it basically will be one lease expense including interest and amortization so will not separately record interest expense and amortization expense for for the operating lease so that's a difference to summarize for the finance lease you will have interest expense and amortization expense for the operating lease you will just have one group that is called the lease expense and the lease expense will equal to interest expense similarly calculated as in finance lease plus amortization amortization will be different however so um there are some differences in the treatment in finance and operating lease however for both we'll have to capitalize the asset and liability so to to understand the detailed accounting methods we really have to look at some examples so we're going to do that in the next video