Leases and changes in financial positions assignment help
Many organizations lease long-term assets instead of buying them. The agreement to lease involves the lessor (the party that owns the purchase) and a lessee (a person or company that leases the asset). Lease agreements can be recorded by either International Financial Reporting Standards (IFRS) or Accounting Standards for Private Enterprises (ASPE). Leases are a popular choice of finance for organizations. We offer help in Leases and changes in financial positions assignments.
What are leases and changes in financial positions?
Leasing is an alternative form of financing. It is a contractual arrangement where one party, the lessee, obtains from another party, the lessor, using an asset for an agreed period for a fixed fee. The leased assets can be tangible (e.g., equipment or real estate) or intangible (e.g., patents). Leases may result in ownership transfer at the end of the lease term when lease payments are left to be paid. However, many organizations elect not to acquire ownership since they prefer to continue using the equipment and do not want financial burden and responsibilities to come with privilege.
Lessor’s accounting treatment: When lessors own leased assets—or have promised to transfer ownership at the end of the lease term—lessors must record on their books a liability for the present value of the future lease payments. Additionally, they may also recognize an asset representing cash received from lessees for using assets during the lease period.
Lessor’s accounting should be by IFRS or ASPE; accordingly, they have to make judgments about whether leased assets are expected useable and available to satisfy contractual leasing revenue obligations (i.e., pre-tax cash flows) that include principal and interest requirements. If they expect this condition to occur, the lessor must estimate these amounts using one of two methods:
They can have many advantages
Lease payments may be much lower than the cost of financing the asset by borrowing funds. In addition, if there is a residual value when the help comes to an end of its useful life, then any amount over and above this value may be returned to the organization leasing the asset.
A schedule makes lease payments of fixed costs that do not change during the lease period, which provides organizations with some certainty about their cash flows. This can help organizations decide on their short-term borrowing requirements and plan for long-term investment in other assets. In addition, it allows investors who use financial ratios to analyze an organization’s performance. These include debt/equity ratios and interest cover ratios.
One of the significant drawbacks of leases is that they create variations in an organization’s balance sheet and its profit and loss account over time, even if there is no significant variation in operating results or economic value created by the leased asset during this time.
The accounting treatment for financial lease contracts depends on the type of contract; in cases where an organization does not intend to buy the asset at the termination of the lease period, a finance lease results. In this case, an asset (the right to use) is acquired by the lessor and subsequently leased and assigns all risk of ownership to the lessee during the lease term.
On the other hand, if an organization intends to purchase or ‘buyout’ assets at the end of the leasing period, then an operating lease applies. Under operating leases, unlike under finance leases, the leasing company remains responsible for maintenance and repairs in addition to normal wear and tear.
The purpose of this paper is to evaluate whether companies that consistently report losses would be better off using operating leases or finance leases.
Benefits of leasing vs. buying
There are many benefits to leasing that may justify your using a lease instead of buying. There may be tax or nontax reasons for doing so, and the article below talks about these financial issues often considered when deciding whether it is better to buy something outright or lease it:
While leasing has become more common to acquire equipment, particularly big-ticket items like medical equipment and computers. Before applying the same principle to standard office equipment, companies usually consider several factors, such as fax machines and copying machines.
Here are some key considerations
Lease arrangements can be off-putting for customers who expect businesses to purchase assets rather than rent them. In addition, excess personal property taxes could result if you later decide to buy the equipment.
Leasing is a business decision.
It would be best to lease because you can’t afford to make the purchase outright or because it seems like a more convenient way to acquire the equipment. If that’s your motivation, you probably will end up paying more in total costs than if you had bought the asset from the start.
Are you sure about ownership?
Leases are intended for those situations in which you want to use an item for a temporary period and then return or sell it at the end of your contract. But many businesses using leases were caught off-guard when they purchased things that they thought would be theirs forever but later discovered that after several years, they actually owned nothing but still owed money on them. This can result in unpleasant surprises, including hefty cancellation charges to end the lease early or legal battles over equipment possession.
Leasing isn’t all bad, of course. It can provide some advantages if you are sure that it is the right choice for your business. For instance:
Lease payments generally are tax-deductible, while you must either depreciate or amortize purchases that add to your company’s assets on its books. Depreciation also offers an annual tax write-off, and spreading out costs over time instead of paying them upfront can help ease financial burdens associated with large purchases.
Mistakes to avoid in Leases and changes in financial positions
When entering into a lease, there are several mistakes that you should try to avoid. For example, not vetting the company that you are leasing from can be problematic. You also want to make sure that your contract is airtight and covers as many contingencies as possible.
You also want to make sure that you’re receiving what you thought you were getting. Otherwise, your financial position may change in ways besides what was expected at first glance with these changes in financial situations.
Most leases are closed out and finished, but in some rare instances, a company may find itself still leasing an item more than a year after initially anticipated. Make sure that you think ahead as to what will happen if your needs change or shift at all.
At the end of a lease, any excess amount left over is typically returned to you; however, there may be situations where additional charges apply. Be aware of those situations before signing a lease agreement so that you don’t get caught off-guard by them down the road with these changes in financial positions. Also, make sure that you receive proper notice for renewal options so that they can be adequately assessed in advance of needing to decide on whether your company should continue leasing an item or not.
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