Current portion of capital leases is the amount due for a long-term capital lease in the next year. Capital leases are agreements which transfer the ownership of the leased asset to the lessee (the farmer or rancher) at the end of the lease term.
In This Section
- What are Current Portion of Capital Leases?
- Types and Examples of Current Portion of Capital Leases
- Current Portion of Capital Leases on the Balance Sheet
- Purpose of Current Portion of Capital Leases
- How to Record Current Portion of Capital Leases on Balance Sheet
- Exclusions from Current Portion of Capital Leases
- Frequently Asked Questions
What are Current Portion of Capital Leases?
The current portion of capital leases on a farm’s balance sheet refers to the portion of the farm’s capital lease obligations that is due for repayment within the next twelve months. Capital leases are lease agreements that effectively transfer ownership of the leased asset to the lessee (the farm) by the end of the lease term. These leases are treated as a form of long-term debt because they involve the lessee making fixed payments over an extended period, similar to loan repayments.
The current portion of capital leases is classified as a current liability on the balance sheet because it represents an obligation that the farmer or rancher needs to fulfill in the near term. It is important for investors and creditors to assess the current portion of capital leases along with other current liabilities to understand the company’s short-term financial obligations and liquidity position.
Types & Examples of Current Portion of Capital Leases
Say for example, if a farm or agribusiness operation has a long-term loan of $100,000, with $20,000 due for repayment within the next twelve months, the current portion of long-term debt would be $20,000.
Several examples of agricultural loans that incur current portion of long-term debt include:
- Farm Operating Loans – Short-term loans obtained to cover day-to-day operating expenses such as seed, fertilizer, feed, and labor costs during the farming season. These loans are typically repaid within one year.
- Equipment Financing – Loans taken out to purchase farm machinery, vehicles, or other equipment necessary for farm operations. These loans may have varying repayment terms depending on the type of equipment and its expected lifespan.
- Land Loans – Loans used to purchase additional land for farming expansion or to refinance existing land debt. These loans often have longer repayment terms, extending over several years or even decades.
- Livestock Financing – Loans acquired to purchase livestock or to cover expenses related to raising and maintaining livestock, such as feed, veterinary care, and transportation costs.
- Infrastructure Loans – Loans used to finance the construction or repair of farm infrastructure such as barns, irrigation systems, fencing, or storage facilities.
- Input Financing – Loans obtained to purchase inputs necessary for specific crops or livestock production, such as specialized equipment, seeds, pesticides, or fertilizers.
- Agribusiness Loans – Loans taken out for investment in related agribusiness ventures, such as processing facilities, distribution networks, or value-added product development.
Current Portion of Capital Leases on the Balance Sheet
Current portion of capital leases is the value of money owed as part of a lease agreement in the near term, usually within a year. As such, current portion capital leases is always considered a current liability on the balance sheet.
Purpose of Current Portion Capital Leases
The current portion of capital leases is classified as a current liability on the balance sheet because it represents an obligation that the farmer or rancher needs to fulfill in the near term. It is important for investors and creditors to assess the current portion of capital leases along with other current liabilities to understand the company’s short-term financial obligations and liquidity position.
How to Record Current Portion Capital Leases on Balance Sheet
The total amount of money owed in the coming year on a capital lease can usually be provided by the lender or financier of the lease. Any amount due in the coming year will be recorded as a capital lease obligation in the balance sheet.
If you are interested in knowing more of the detail, here’s how the current portion of capital leases is typically handled on a farm’s balance sheet:
- Identification – The farm identifies the portion of its capital lease obligations that is due for repayment within the next twelve months. This may include lease payments that are scheduled to be made in the upcoming operating cycle or fiscal year.
- Valuation – The current portion of capital leases is valued at the present value of the lease payments that are due within the next twelve months. This represents the amount of lease obligations that the farm needs to pay off in the short term.
- Classification on Balance Sheet – The current portion of capital leases is classified as a current liability on the farm’s balance sheet, alongside other short-term obligations. It appears under the current liabilities section.
- Disclosure – In the notes to the financial statements or accompanying footnotes, the farm may provide additional information about its capital lease obligations, including details about the leased assets, lease terms, lease payments, and any associated obligations or covenants.
- Repayment – As the current portion of capital leases becomes due for repayment within the next twelve months and payments are made, it may be reclassified on the balance sheet. Any lease payments that extend beyond the next twelve months would be reclassified as long-term liabilities.
Overall, the current portion of capital leases on a farm’s balance sheet represents the short-term portion of the farm’s lease obligations, providing insight into its short-term financial obligations and liquidity position.
Exclusions from [ACCOUNT NAME] on the Balance Sheet
In a farm balance sheet, the current portion of capital leases represents the payments due within the next 12 months for lease agreements classified as capital leases (now referred to as finance leases under current accounting standards). Common exclusions from the current portion of capital leases ensure that this account accurately reflects only the short-term obligations related to capital lease agreements. Here are some typical exclusions:
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Interest Payable: The interest component of lease payments due within the next year is excluded from the current portion of capital leases. Interest payable is typically recorded separately under current liabilities.
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Operating Lease Liabilities: Payments due under operating leases (or short-term leases) within the next year are not included in the current portion of capital leases. These are listed separately, often under current lease liabilities or operating lease liabilities.
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Principal Payments on Long-Term Debt: Principal repayments on loans or other long-term debt obligations are excluded from the current portion of capital leases and are instead recorded as the current portion of long-term debt (CPLTD).
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Accounts Payable: Obligations to suppliers for goods and services received are listed under accounts payable, not included in the current portion of capital leases.
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Accrued Expenses: Expenses that have been incurred but not yet paid, such as wages, utilities, and taxes, are recorded under accrued expenses or other current liabilities.
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Taxes Payable: Income taxes and other taxes due within the next year are recorded separately under current liabilities as taxes payable.
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Short-Term Debt: Any short-term borrowings or loans due within one year are classified under current liabilities as short-term debt or short-term borrowings, not under the current portion of capital leases.
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Deferred Revenue: Payments received in advance for goods or services to be delivered in the future are listed under current liabilities as deferred revenue or customer advances.
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Contingent Liabilities: Potential obligations that depend on the outcome of future events, such as lawsuits or guarantees, are disclosed in the notes to the financial statements rather than included in the current portion of capital leases.
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Maintenance and Repair Costs: Costs for maintenance and repairs related to leased equipment or property are not included in the current portion of capital leases. These are recorded as operating expenses.
By excluding these items, the current portion of capital leases on the farm balance sheet accurately represents only the principal portion of capital lease payments due within the next 12 months. This specificity ensures clear financial reporting and aids in assessing the farm’s short-term lease obligations and overall liquidity.
Frequently Asked Questions
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