Page 13 - FINAL CFA I SLIDES JUNE 2019 DAY 9
P. 13
Session Unit 8:
31. Non-Current (Long-Term) Liabilities
LOS 31.f: Explain motivations for leasing assets instead of purchasing them., p.281
Lease can be operating or finance lease –we saw this before!
Why do we lease (operating -but to some extent finance) instead of buying?
• Less costly financing -lease requires no initial down payment; so, conserves cash (both);
• Reduced risk of obsolescence -at the end, the asset can be returned to the lessor (operating);
• Less restrictive provisions -Leases can provide more flexibility than other forms of financing
tanties
because it can be negotiated to better suit the needs of each party (finance);
• Off-balance-sheet financing -operating lease does not result in a balance sheet liability, so
reported leverage ratios are lower compared to borrowing to purchase assets (operating);
• Tax reporting advantages. In the US, firms can create a synthetic lease -lease is treated as
capital/finance (ownership position) for tax reporting (you deduct depreciation and interest
expense for tax purposes) but for financial reporting, the lease is treated as a rental
agreement (operating) and the lessee does not report the lease liability on the balance sheet.
