Question

Be sure to provide clear examples and data that supports your position.

The following topics must be included:

1. How is leasing used in the Pharmaceutical Industry?

2. Please give a comparison of Leasing versus Renting within a corporation?

Answer 1

Leases are used in the Pharmaceutical industry in a variety of ways. Pharma companies typically lease buildings, company cars and computers, many of which are currently accounted for as operating leases. Medical device companies often lease their equipment to hospitals as a lessor.

IFRS 16, ‘Leases’

The new lease accounting standard will fundamentally change the accounting for lease transactions and is likely to have significant business implications. Almost all leases will be recognised on the balance sheet for a lessee, with a right of use asset and financial liability that recognise more expenses in profit or loss during the earlier life of a lease. This will have an associated impact on key accounting metrics, and clear communication will be required to explain the impact of changes to stakeholders.

In pharma, as in most industries, the historical perspective of managing a fleet this large has been that it’s a necessary cost of doing business. A company needs these vehicles to bring in income, so traditionally they were leased or purchased and maintained but not necessarily according to a larger strategic plan designed to maximise ROI.

In England and Wales, business premises are either purchased freehold (the buyer owns the building or unit) or leasehold (the buyer is granted use of the premises for a specified period and pays rent).

Leasehold purchases require less investment up front, but commercial leases usually impose considerable burdens on the person to whom they are granted (the lessee). Such burdens include the responsibility for all repairs and maintenance to the premises, as well as liability for all outgoings.

Lease vs Rent:-

1) DURATION:-

Rent :- Rental agreements have no set period or term and as such do not necessarily require one to enter into a contract.

Lease :- Lease agreements are usually contracts and have set term and duration.

2) Change in Rentals:-

Rent :- Rental payments can differ from month to month.

Lease :- Lease payments are fixed for the entire duration of the lease and are usually decided at the beginning of a lease period.

3) TERMS OF AGREEMENT :-

Rent :- Either party to a rental agreement can change the terms of the agreement, at the end of any month, in most asset cases.

Lease :- Unlike renting, under leasing, none of the parties can change terms of agreement during the lease period as lease terms are fixed while entering into the lease agreement.

4) LONG-TERM CONTRACT :-

Rent :- Renting is usually used in cases when an asset is required for a short duration and entering into a long-term contract is financially unviable and not required.

Lease :- If a business needs an asset for a longer duration (say 10 to 100 years) and is ready for financial commitment, it is advisable to enter into a fixed term, longer duration contract. This also helps in the budgeting process.

5) PURCHASE OPTION:-

Rent :- At the end of a rental contract, the person renting out an asset has to return the asset to its owner

Lease :- At the end of a lease contract, the lessee has an option to extend the lease, return the asset or purchase it for its salvage value.