Which of the following best describes a capital lease?

A capital lease is characterized by the transfer of the risks and rewards of ownership of the leased asset to the lessee, which reflects the property as an owned asset on the lessee's balance sheet. This means that the lessee effectively treats the lease as a purchase for accounting purposes, recognizing both the asset and the corresponding liability associated with future lease payments.

This method contrasts with an operating lease, where the lease does not result in asset ownership and is usually treated as a rental expense, not reflected on the balance sheet. Capital leases are often long-term agreements and include options such as ownership transfer at the end of the lease term, making them distinct from short-term leases or those with flexible payment options. This accounting treatment is essential for proper financial reporting and provides a clearer picture of an entity's financial position.

In essence, the defining aspect of a capital lease is the treatment of the asset as owned, which aligns with the principles of ownership transfer under certain leasing agreements.