How does a capital lease differ from a true lease?

A capital lease is distinct from a true lease primarily because, at the end of a capital lease, there is an option for the lessee (the jurisdiction, in this case) to purchase the asset, typically at a bargain price. This provides the jurisdiction with the opportunity to acquire the asset permanently, often making it financially beneficial over the term of the lease. In contrast, a true lease (or operating lease) does not confer ownership of the asset upon completion of the lease term, and instead, the asset is returned to the lessor.

Capital leases are often treated similarly to asset acquisitions in financial reporting, leading to the recognition of the asset and corresponding liability on the lessee's balance sheet. This reflects the long-term nature of the lease, emphasizing the transfer of ownership benefits. Thus, the aspect of potentially purchasing the asset at the end of the lease is a fundamental distinction between a capital lease and a true lease.