LOS F requires us to:
explain motivations for leasing assets instead of purchasing them
a. There is more than one way of fulfilling the requirement of an asset by a business. It may choose to purchase it or it can opt to lease it.
b. A lease is a contract outlining the terms under which one party agrees to rent property owned by another party. It guarantees the lessee, also known as the tenant, use of an asset and guarantees the lessor, the property owner or landlord, regular payments for a specified period in exchange.
Benefits of Leasing
There are some advantages of leasing over purchasing an asset. They are:
Cost-Effectiveness
Leasing an asset is generally considered less costly than buying it. There is a very little or no down payment required to lease an asset. Also, the financing cost for the same is very less.
There is also a lower cost of servicing the asset.
Tax Benefits
There is a higher tax benefit for the lessor as compared to the buyer in terms of interest and depreciation.
Lower Risk
There is a lower risk of obsolescence, residual value, and disposition of assets.
Lower Restriction
A well-negotiated lease contract has lower restrictions in comparison to the borrowed assets.
NOTE
It should be noted that there are different tax laws in different countries for reporting income, depreciation, and expensing the interests associated with the lease.