Capital lease obligations are the amount due for long-term asset lease agreements that are nearly equivalent to asset purchases.
A company can use a capital lease to effectively finance the purchase of an asset without ever technically purchasing the asset. A capital lease gives the company control over an asset for a large portion of its useful life, with all the risks and benefits attributed to ownership. Capital leases act as a form of financing because the company does not have to purchase the asset outright, but rather, makes monthly payments for the asset. A capital lease for an asset is quite similar to a consumer's car lease.
Capital lease obligations are installment payments that constitute a payment of principal plus interest for the capital lease. Capital lease obligations are listed in the liabilities section of a balance sheet while the property or asset leased is listed in the assets section of the balance sheet. The current portion of a capital lease obligation is the portion of a long-term capital lease that is due over the next year.
Under US Generally Accepted Accounting Principles (GAAP), a capital lease is essentially equivalent to a purchase by the lessee if it meets the following criteria: