9.7 Leasing

Question 1

What is a leasing agreement?

Answer 1

An agreement between a lessor and lessee, where the lessee pays the lessor for use of an asset.

Question 2

What is a finance lease?

Answer 2

A non-cancellable and long-term financing agreement - the lessor buys the asset and provides it for use to the lessee for an agreed rent, with interest.

Question 3

What is an operating lease?

Answer 3

An off-balance short term financing of an asset, in which the lessee agrees to rent an asset from the lessor. The lessor continues to be liable for the asset and its maintenance/repair.

Question 4

How does IFRS 16 treat lessee/lessor arrangements?

Answer 4

The lessee must recognise assets and liabilities for all leases with a term of more than 12 months unless the asset has a low value.

Question 5

What are the advantages of leasing?

Answer 5

• A company does not have to spend much upfront and can pay a small monthly or yearly rental
• Payments on operating leases are tax-deductible
• leasing is usually cheaper than other finance sources such as loans
• the lessee gets maintenance and technical support
• the lessee pays a fixed monthly or annual payment, even if the cost of the asset increases.
• after the end of the lease, the lessee usually has the option to purchase the asset at residual value.

Question 6

What are the disadvantages of leasing?

Answer 6

• a finance lease is non-cancellable
• finance leases can become costly due to incidental costs
• the legal ownership of the asset is held by the lessor not the lessee

Question 7

What is a sale and leaseback arrangement?

Answer 7

A structured transaction in which an owner sells an asset to another party while maintaining the legal rights to use the asset or lease back from the buyer-lessor.