LEASING VERSUS BUYING
As far as the lessee is concerned, it is the use of the asset that is important, not necessarily who has title to it. One way to obtain the use of an asset is to lease it. Another way is to obtain outside financing and buy it. Thus, the decision to lease or buy amounts to a comparison of alternative financing arrangements for the use of an asset. Figure B.1 compares leasing and buying. The lessee, Sass Company, might be a hospital, a law firm, or any other firm that uses computers. The lessor is an independent leasing company that purchased the computer from a manufacturer such as Hewlett- Packard (HP). Leases of this type, in which the leasing company purchases the asset from the manufacturer, are called direct leases. Of course, HP might choose to lease its own computers, and many companies, including HP and some of the other companies mentioned previously, have set up wholly owned subsidiaries called captive finance companies to lease out their products.1
As shown in Figure B.1, whether it leases or buys, Sass Company ends up using the asset. The key difference is that in one case (buy), Sass arranges the financing, purchases the asset, and holds title to the asset. In the other case (lease), the leasing company arranges the financing, purchases the asset, and holds title to the asset. OPERATING LEASES
Years ago, a lease in which the lessee received an equipment operator along with the equipment was called an operating lease. Today, an operating lease (or service lease) is difficult to define precisely, but this form of leasing has several important characteristics. First of all, with an operating lease, the payments received by the lessor are usually not enough to allow the lessor to fully recover the cost of the asset. A primary reason is that operating leases are often relatively short-term. Therefore, the life of the lease may be much shorter than the economic life of the asset. For example, if you lease a car for two years, the...
Please join StudyMode to read the full document