Chapter 21 Summary
Many companies these days choose to lease buildings or certain structures rather than owning them because there is more money involved in leasing a property. In 2010 521 billion dollars were made through leasing properties. The question to answer is what type of equipment may be leased, and the answer is any type of equipment is allowed to be leased. For example; railcars, helicopters, bulldozers, barges, CT scanners, computers, and the list goes on and on. Three types of Lessors
There are three main types of lessors and they are banks, captive leasing companies, and independents. Banks are generally the biggest players in the leasing business. They have low funds which allow them to purchase assets at a lesser cost than their competition and they are more aggressive in the leasing markets. Banks also have a big advantage because now transactions are more standardized which gives banks an advantage because they do not have to innovate in structuring lease arrangements.
Captive Leasing Companies are subsidiaries whose primary business is to perform leasing operations for the parent company. Companies such as CMS corps, Ford, and IBM are all companies that facilitate the sale of products to consumers. These types of companies have a point-of-sale advantage in finding leasing customers. The current trend for these types of companies is to focus more on their companies’ products rather than lease financing.
Independents are the final category of lessors. Over the past few years independents have not done well in the market. Their shares have dropped more dramatically as banks, and leasing companies have taken over the market being more aggressive in the past couple of years. They are often good at developing innovative contracts for lessees. In addition they are starting to act as captive finance companies for some companies that do not have leasing subsidiary. Advantages of Leasing
Leases are often signed without requiring any money down for the lessee. This often helps the lessee save cash and save the lessee from unfixed rates where inflation comes into play. Protection against obsolescence is another advantage of leasing which protects the lessee and in many cases passes the risk of residual value to the lessor. Lease agreements may contain less restrictive provisions than other debt agreements so there is a line of flexibility to leasing. Some companies find leasing cheaper than other forms of finance which makes leasing a cheaper solution. In some cases, companies can get both things that they want which means they can lease a property and get tax advantages on their lease. Finally the last advantage to leasing is off-balance sheet financing which certain leases do not add debt on a balance sheet, or affect financial ratios.
Conceptual Nature of a Lease
There are four views to capitalization of leases and they are as follows. Number one do not capitalize any leased assets. This view considers capitalization inappropriate, because the company does not own the property. Furthermore, a lease is an executor contract requiring continuing performance by both parties. The second view is capitalize leases that are similar to installment purchases. The view holds that companies should report transactions in accordance with their economic substance. Therefore, if companies capitalize an investment purchase, they should also capitalize leases that have similar characteristics. Capitalize all long-term leases is the third view. This approach requires only the long-term right to use the property in order to capitalize. This property-rights approach capitalizes all long-term leases. The final view is capitalizing firm leases where the penalty for nonperformance is substantial. This final approach advocates capitalizing only firm contractual rights and obligations. Firm means that it is unlikely to avoid performance under the...