Leasing versus Purchasing Assets
- A firm may choose to purchase outright a long-lived asset, such as an airplane or an office building, giving the firm full benefit and risk from asset ownership; however it may also enter into a lease agreement with another firm, to lease an asset and assume partial benefit and risk associated with the asset.
- Lessee – “borrower” of the leased asset.
- Lessor – “lender” of the leased asset.
- Operating Lease – typically a short-term lease where the lessor retains most of the benefits and risks associated with owning the asset.
- Capital Lease – typically a long-term lease where the lessee assumes most of the benefits and risks associated with owning the asset.
- In capitalizing a lease, an equal balance sheet asset and liability are created and both are reduced over the term of the lease; these reductions are expensed to the income statement.
- Lessees and Operating Leases – a company may be incented to treat leases as operating leases because the financial commitment associated with the operating lease contract is not recorded on the balance sheet as a liability. Operating leases can be seen as a form of off-balance sheet financing for a company. If a lease is capitalized by a lessee, the resulting liability will have debt-like impacts on a company’s financial ratios.
- Lessors and Capital Leases – companies who act as lessors may be incented to treat leases as sales-type capital leases in order to show higher net income.
LESSONS
- CFA Level 2: Financial Reporting Part 1 - Introduction
- Financial Reporting: Important Definitions
- FIFO and LIFO Methods for Inventory Expensing
- Inventory Accounting and Financial Statements
- Inflation/Deflation and Inventory Accounting Analysis
- LIFO – Tax and Cash Flow Note
- LIFO Reserve and Converting LIFO Net Income to FIFO Net Income
- LIFO Liquidation
- Inventory at Net Realizable Value
- Impacts of LIFO and FIFO Inventory Methods on Selected Financial Ratios
- Accounting of Long-lived Assets - Expensing vs. Capitalizing
- Depreciation Methods for Property, Plant, and Equipment (PPE)
- Impact of Depreciation Method
- Depreciation - Important Points
- Impairment of Long-lived Assets
- Impact of Asset Impairment
- Revaluation of Property, Plant, & Equipment (PPE)
- Leasing versus Purchasing Assets
- Traditional Lessee Accounting in US GAAP
- Effects of Leases on Selected Financial Reporting Items for Lessees
- Lessor Accounting for Leases
- Lessors and Sales-Type Capital Leases
- Lessors and Direct Financing Capital Leases
- Effect of Leases on Financial Statements for Lessors
- Future of Lease Accounting
- CFA Level 2: Financial Reporting 1 - Recommendations
R Programming Bundle: 25% OFF
Get our R Programming - Data Science for Finance Bundle for just $29 $39.
Get it now for just $29