Synthetic lease

Synthetic lease,

Definition of Synthetic lease:

  1. A synthetic lease is an off-the-balance sheet operating lease whereby a special purpose entity, established by the operating or parent company, purchases an asset and then leases it back to the operating company. The synthetic lease is popular among publicly traded companies that seek to improve debt to equity ratios as the asset is shown on the balance sheet of the special purpose entity and expensed on the parent/operating company's income statement.

  2. Arrangement in which an entity creates a firm to take a loan to purchase a property. The property is leased to the entity such that the lease rent equal the interest rate on the loan whose principal is paid off with a balloon payment upon maturity.

  3. With a synthetic lease, the special purpose entity treats the lease as a capital lease for tax purposes and charges depreciation expense against its earnings. Essentially, the synthetic lease allows a company to lease an asset to itself. However, the asset does not show up on the balance sheet of the parent company. Instead, the parent company treats it as an operating lease for accounting purposes, recording it as an expense on the income statement.

How to use Synthetic lease in a sentence?

  1. The asset is owned by the lessor for accounting purposes but is owned by the lessee for tax purposes.
  2. For the parent company/lessee, the depreciation of the asset does not affect net income, as shown in the income statement.
  3. A synthetic lease is an operating lease in which a special purpose entity, owned by a parent company, purchases an asset and leases it to the operating company.
  4. The lessee can, however, claim depreciation deductions for tax purposes.

Meaning of Synthetic lease & Synthetic lease Definition