According to standard accounting principles, how should Capital Leases be reported?

Capital leases, now referred to in updated accounting standards as finance leases, must be reported on the balance sheet as both an asset and a liability. This is because a capital lease transfers substantially all the risks and rewards of ownership of the leased asset to the lessee. By recognizing the asset, the lessee acknowledges their right to use the asset, while recognizing the corresponding liability reflects the obligation to make lease payments.

Under standard accounting principles, the asset would be recorded at the present value of the future lease payments, and the liability would reflect the same amount. This dual recognition aligns with the principles of transparency and accountability in financial reporting, ensuring that stakeholders have a clear understanding of both the resources controlled by the entity (the leased asset) and the obligations it must fulfill (the lease liability). This is a departure from the prior treatment of operating leases, which did not require recognition on the balance sheet, emphasizing the importance of classifying leases accurately to provide a true and fair view of an entity's financial position.