Scenario:
Many companies choose to lease equipment, automobiles, etc. in lieu of purchasing the items. Many of these leases are done as operating leases where the company only needs to record the lease expense and cash outlay. There is no disclosure on the face of the balance sheet that indicates the liability. The notes to the financial statements do disclose the operating leases. This is an effective method of off-balance sheet financing.
Required:
After exploring the differences between capital and operating leases, do you feel that companies should be allowed to finance through operating leases and not have full disclosure on the balance sheet? Why or why not? Please support your posting.