Introduction | |
Throughout this course, as well as in FI515, we haveassumed that firms own fixed assets and report them on their balance sheets. However, since it is the productive use of assets that is important and not necessarily the form of ownership, we'll spend some time this week looking at leasing as an alternative to buying. This alternative way of obtaining the use of equipment and facilities is currently available for virtually any kind of fixed assets, with over 30% of all new capital equipment being currently financed through lease arrangements.
Lease transactions involve two parties: the lessor, who owns the property, and the lessee, who gains the right to use of the property in exchange for one or more lease, or rental, payments. | | Types of Leases | |
In chapter 19, you will find a description of the five most important types of leasing arrangements, which include 1. operating lease, 2. financial, or capital, lease, 3. sale-and-leaseback arrangement, 4. combination lease, and 5. synthetic lease.
Please keep an eye on the so called "synthetic" leases, which are still subject to a great deal of controversy after their "creative" use by such corporate names as Tyco and Enron. | | Tax Effects | |
The full amount of the lease payments is a tax-deductible expense for the lessee for as long as the IRS agrees that a particular contract is a genuine lease and not just a loan called a lease. This makes it important that a lease contract be written in a form that complies with IRS requirements. A lease that complies is called a tax-oriented lease, and the tax benefits of ownership (depreciation and any investment tax credits) belong to the lessor (tax guidelines are presented on pp. 736-738). | | FAS 13 - Capitalized versus Operating Leases | |
The process of long-term lease capitalization is regulated