Capital Leases and Operating Leases Essay

Disadvantages of leasing include the zero accumulation of equity. Also if the lease period is too long, you could be locked into an agreement for space that no longer serves your needs. Additionally, the property manager or landlord can limit expansion and modification (Spohn, 2010). These issues would need to addressed with the landlord prior to avoid any issues post-signing.

The lease agreement comes out to be the better option when the lease term is long at about 60 months than a purchase agreement for the same length of time. This is because in the lease agreement, the company is able to break even at about 51 months as compared to the purchase agreement which needs the company to make the payments till the end of the term in order to breakeven. In addition to this,

Leasing business equipment and tools preserves capital and provides flexibility. Less Capital Investment will be required as part of this setup, as compared to owning the equipment.

An alternative to traditional equity and debt financing is leasing. Leasing is undertaken primarily for what purposes?

The reason we want to capitalise the lease commitments is that reporting under operating assets leads to substantial amounts of off-balance-sheet assets and liabilities. Hence, it is difficult to compare financial statements between two similar companies but use different accounting methods for essentially the same transaction.

C. In a sales-type lease the carrying value of the asset is charged to cost of the asset leased (expense), and the present value of the minimum lease payment as the amount of the sale. For direct financing leases no sales or expense is recognized because the asset is removed from the books. The difference between its carrying value and the undiscounted minimum lease payments is recorded as unearned interest revenue. The net investment in a sales type lease ia accounted for in a similar manner as a direct financing

Then thirdly, the operating lease is when the lessor depreciates the leased asset according to its depreciation policy. The maintenance costs of the leased asset are charged as an expense, the costs, such as finder’s fees and credit checks, are amortized over the lease term, and the leased equipment and accumulated depreciation are shown as equipment leased to others. Usually any lease that do not fall under the criteria for a direct financing lease or sales-type lease are recorded as an operating lease.

From the above classification we can see that all the points indicate that the leases undertaken by David Jones Ltd as a Lessee are Operating Leases or Finance leases and can be determined using the steps above. Being such a big company, David Jones Ltd has both Operating and Financial leases and they are taken mainly to run the firm’s stores and warehouses. Under the annual report for the half year ended 2013 it is clearly evident that the cost of leasing activities for David Jones Ltd has increased by 4.17mn. “Payments made under operating leases, where the lease agreement includes predetermined fixed rate increases, are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease. Other operating lease payments are expensed as incurred. Lease incentives received are recognised in the Statement of Comprehensive Income as an integral part of the total lease expense and spread over the lease term.”

At the lease commencement, finance leases are capitalised at the fair value of the leased property, otherwise the present value of the minimum lease payments if lower (MHI, 2014). Other short term and long term payables include the relevant rental obligations and net of finance charges (MHI, 2014). Every lease payment is apportioned between the liability and finance charges (MHI, 2014). The finance cost is indicated in the comprehensive income statement for the lease period as well as to generate a constant periodic rate of interest on the remaining balance of the liability for each period (MHI, 2014). During the lease term, the depreciation is considered for the useful life of the asset such as the property, plant and equipment assigned under finance leases (MHI, 2014). The portion of the risks and rewards of ownership are persevered by the lessor are categorized as operating leases for leases (MHI, 2014). For the period of the lease, all payments made under operating leases less any incentives from lessor are indicated in the comprehensive income statement on a straight-line basis (MHI,

Although many variations of lease financing are available, potential lessees should be familiar with two general types of leases: the full payout lease and the fair market value (FMV) lease. The choice of lease is based upon the lessees’ long-term plans for the asset involved. A full payout lease is one in which the present value of the payment stream equals the acquisition cost of the asset. Options at the end of the lease typically include return, renewal, or purchase often for $1. The lessee is able to deploy and utilize the equipment, while the periodic payments of the full payout lease ease the financial burden of making a large IT acquisition. This option is a good choice when future ownership is desired, the dollar value of the equipment is substantial, the expected productive life of the assets is longer than five years, and the flexibility of spreading out payments would

David Jones does not included leases as part of their intangible assets but Myer does. This shows the different ways of recording accounting record between its competitors, and managers have an incentive to determine on the choice of recording items. This reflects business operation reflecting in its underlying business reality. Therefore, manager has higher chance to manipulate the accounting

The difference between operating lease and sales-type lease is that in sales type lease the lessor sets a selling price above the asset cost, thus recognizing an immediate profit at the inception of the lease. Whereas, in operating lease income recognized using a straight-line basis over the life of the lease. Income would be spread out further on a sale-type lease thus spreading out the tax liability over the period of time. Therefore it would be beneficial for Sable Inc. to record the lease of bulldozer as sales type

In today’s world, customers often face a dilemma about whether to buy or lease. Lease is an agreement in which one party gains a long term rental agreement, and the other party receives a form of secured long term debt. On the other hand, buying involves transfer of ownership from seller to buyer. Buying or leasing decision depends mostly on customer’s preference. There are many factors to consider before taking a buying or leasing decision.

According to Steve Collings (2010), the accounting treatment of leases has presented a lot of problems over the years for the particular profession. Problems are observed in the way some leases are being treated in a business’ income statement and statement of financial position. Although, as we are going to expand more on that, the major problem of accounting for leases according to Collings (2010), is the manipulation of financial statements by incorrectly categorizing ‘finance leases’ as ‘operating leases’. The main purpose of the essay is to discuss why accounting for leases has been so controversial and whether the new standard (IFRS16) will give a more meaningful picture of companies’ financial position for lessees.

books and depreciated, and the lessee recognizes lease payments in the income statement in the period in which it is paid.