The Advantages of Leasing
Leasing brings six major advantages, and all directly involve the company’s cash flow. Essentially, the advantage to leasing over buying is that there’s usually no large outlay of cash at the beginning of the lease as there is with an outright purchase.
100 percent financing: Many business leases come with 100 percent financing terms, which means no money changes hands at the inception of the lease. Can you imagine what a boon to cash flow this can be?
Well, it’s not totally cash-free, because the lessee has to make the lease payments each month. But many times the assumption is that the company will be making the payments from future cash flows — in other words, from enhanced revenues that the company earns because of the lease.
Obsolescence: Another advantage to leasing is working around obsolescence, which means the company anticipates frequently replacing the fixed asset. For example, many larger clients lease rather than purchase their computer equipment so they can stay current with new and faster computer processing technology.
Flexibility: Asset flexibility is another leasing advantage. Based on the relationship between the lessor and the lessee, the lease may be for either just a few months or the entire expected life of the asset. Or let’s say an employee for whom the company leases a vehicle leaves the company.
Predicated on the terms of the lease, the company doesn’t have to worry about advertising the car for sale and trying to find a buyer, as it would with an owned vehicle — the company just turns the car back in to the leasing company.
Lower-cost financing: Based on many different variables, a company may be able to utilize tax benefits associated with leasing. This topic is a more complicated tax issue that is more appropriate for your taxation classes.
Tax advantages: Separate from any tax benefit a company may gain, lease payments can reduce taxable income in a more appropriate manner than depreciation expense. Remember that you treat operating leases like rentals by expensing the entire lease payment when the business makes it.
Before you get all excited about paying fewer taxes, there’s usually only a timing difference in taxes paid with leased versus purchased assets. Basically, taxes saved today will eventually have to be paid tomorrow.
Off-balance-sheet financing: Finally, operating leases provide off-the-books (or balance sheet) financing. In other words, the company’s obligation to pay the lease, which is a liability, doesn’t reflect on the balance sheet. This can affect a financial statement user’s evaluation of how solvent the company is because he will be unaware of the debt—hence the importance of footnotes to financial statements.
Working jointly, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have initiated a joint project to develop a new approach to lease accounting, to ensure that assets and liabilities that arise under leases extending 12 months past the balance sheet date are recognized in the statement of financial position.
Round-table discussions started in 2010. Most currently, on July 21, 2011, the two boards reexposed their revised proposals for leasing standards, allowing interested parties to comment on revisions since August 2010.