1. Explain how leases are used by companies and the advantages of this financial arrangement. 2....

1. Explain how leases are used by companies and the advantages of this financial arrangement.

2. Identify the new standards and the expected impact in financial reporting.

3. Distinguish between the different classifications of leases.

Solutions

Expert Solution

1. Leasing can help companies to better manage the operations, company's systems, and manage the capital effectively.

Substantially leasing allows the customers to finance the equipment cost up to 100% with certain costs viz., insurance cost, maintenance cost, ad delivery cost.

The company may ask for customers to keep their equipment off-balance-sheet for maintaining compliance with the loan agreement, for improving financial position.

3. Leases classify into two categories:

Finance Lease & Operating Lease

Finance lease transfers majorly all the risks and rewards that relate to ownership of an asset to the lessee by the lessor but not the legal ownership.

whereas, Operating lease does not transfer all the risks and rewards related to ownership.

The finance lease will get ownership of the leased asset at the end of the lease term. The lessee has an option to buy the leased asset at the end of the lease term at price, which is lower than its fair value.

Whereas, In Operating Lease, lease payments under an operating lease should be recognized as an expense in the statement of profit and loss over the lease term.

ekkarill92 answered 2 years ago

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