The paper 'Leases and Liabilities' is a great example of a FInance and Accounting Assignment. Leasing promotes the technological advancement of an organization. In return, this enables an organization to maximize effectiveness and productivity. The technologically advanced organization is likely to comply with an issue like regulation on e-waste disposal as opposed to organizations that use obsolete technology. Lastly an organization can upgrade equipment to the latest technologies by modifying the lease as opposed to buying on the same. Flexibility Leases allow an organization to spread the total asset leasing cost across the lease period.
This option promotes flexible monthly payments and reduces high upfront costs. The amount paid monthly, quarterly, or yearly can as well be customized to favor organizational budget levels. Fixed Payments The lease agreement indicates the amount payable by the lessee to the lesser for the entire lease period. This amount is fixed hence enables an organization to effectively and consistently budget for its cash flow. The fixed amount payable protects an organization from increased interest rates. Lower up-front costs Leasing allows an organization to acquire the needed solution in spite of the fact that their current budget does not allow cash outright purchases.
Operational credit lines line and working capital can be preserved through lease financing and considering the fact that leases require no or little down payment. This option makes the money available to finance other operational expenditures (Ullsperger, 2016). 1 (b) Finance and operational leases According to Carson, R., & Partners, S.E. (2010), the financial lease is a lease in which the owner (lessor) permits the user (lessee) to pay rent and use an asset for a greater period of its economic life.
Operating lease is a lease in which the owner (lessor) allows the user (lessee) to use an asset for a lesser period of time than its economic life against rent payment. A finance lease is a lease whereby substantially all risks and rewards related to leased asset ownership are transferred to the lessee. In accordance with the authors, the following characteristics can be used to evaluate if a lease is a financial or operating lease. Asset Ownership A lease is classified as a finance lease if the lessee has the option of purchasing the asset at a price considered significantly lower than its fair value although the title of the asset may remain with the owner (lessor).
In an operating lease, ownership of the leased asset remains in the lessor’ s custody and the lesser does not have an option to purchase the asset at the completion of the lease period. Accounting Effects Finance lease is treated as a loan and the asset ownership is perceived as for the lessee therefore the asset is incorporated in their balance sheet. On the other hand, operating lease is considered as rental and payment of the leased asset is viewed as operating expenses and the asset does not appear on the balance sheet. Expenses In operating lease, only monthly payments are made by the lessee while in the finance lease the lessee bears maintenance, taxes, and insurance expenses.
Furthermore, in the financial lease, the lessee is entitled to both depreciation and interest since the lease is considered as a loan, while in operating lease, payment of lease is considered as an expense therefore claims on depreciation cannot be made.