Definition:

Long-Term Leases are contractual agreements where a lessee rents an asset from a lessor for an extended period, typically longer than one year. These leases often involve significant assets such as real estate, machinery, or vehicles.

Examples

Examples of Long-Term Leases include leasing office space for a business, renting industrial equipment for a manufacturing process, or leasing a fleet of vehicles for a delivery service.

Formula:

There is no specific formula for Long-Term Leases, but the calculation of lease liabilities and right-of-use assets under accounting standards like IFRS 16 or ASC 842 involves present value calculations of lease payments.

How to use the metric:

Long-Term Leases are used to assess a company's financial obligations and asset utilization. They impact financial statements by recognizing lease liabilities and right-of-use assets, affecting key metrics like EBITDA, debt ratios, and asset turnover.

Limitations:

Long-Term Leases can obscure a company's true financial position if not properly disclosed. They may lead to off-balance-sheet financing, making it difficult to assess a company's leverage and financial health accurately.

Applies to:

Long-Term Leases are common in industries with significant capital asset requirements, such as real estate, transportation, manufacturing, and retail.

Doesn't apply to:

Industries with minimal asset requirements or those that rely heavily on short-term contracts, such as software development or consulting, may not frequently use long-term leases.

Summary:

Long-Term Leases are essential financial agreements for accessing and utilizing significant assets without outright ownership. They impact financial reporting and analysis, requiring careful consideration of their implications on a company's financial health and performance.