The Pros And Cons Of Leasing

Companies use leases in order to obtain assets that would potentially cost them more to own or negative to use credit to obtain. Leasing has a reputation amongst individuals who cannot obtain the entire information of the companies use of the lease due to the accounting treatment it has. This can lead to false representations in the financial statements. With the International Accounting Board (IASB) that creates and approves financial reporting standards proposed change to the accounting methods for lease purposes, this can provide a curve to how companies record the transaction. Leasing is a form of contract that sets an agreement for borrowing/utilizing an item or land for a specific amount of time along with payments over the duration

According to Staff (2015), “The new standard retains the straight-line expense recognition for operating leases on the income statement” (p. 1). This method is used as the expected pay periods are the same with the same rate throughout the life of the lease. For a leased office space this would be the (Total rent payment of the contracted lease term/ the number of months). Cash flow should still be predictable under the new accounting rules for leases and companies that lease still see the benefits. Rather than buying the equipment that would cost more upfront, leasing allows to pay less for the same equipment and use the saved cash on other investments that will increase the value of

The presentation on the financial statements will still depend on whether the lease is classified as a Type A or Type B lease and recorded to match the data. Asset and liabilities will be computed on the balance sheet of a lease obligation more than 12 months with a right-to-use asset report and liability to match. Due to front loading, the lease expense will match and adjust accordingly due to the periods in which the expense is higher and lower towards the ending of the lease obligation. Interest charged will be recognized separately from the liability of the lease. Year-end reporting will also have the information of the leases on the annual report that meet the Type A or Type B requirements along with the 12-month requirement. Financial disclosure notes will still be the same as itemizing smaller lease payments for the future will still exist. The new accounting rules will have an impact on income tax recorded as far as deferred