ACCA F9 Financial Management 1.Lease or Buy Decisions 1.1Introduction 1.1.1Rather than buying an asset outright, using either available cash resources or borrowed funds, a business may lease an asset. 1.1.2Finance lease: (a)A finance lease exists when thesubstanceof the lease is that thelessee enjoys substantially all of the risks and rewards of ownership, even though legal title to the leased asset does not pass from lessor to lessee. (b)A finance lease is thereforecharacterised by one lessee for most, if not all,of its useful economic life, with the lessee meeting maintenance and similar regular costs. (c)A finance leasecannot be cancelled, once entered into, without incurring severe financial penalties. A finance lease therefore acts as akind of medium- to long-term source of debt financewhich, in substance, allows the lessee to purchase the desired asset. (d)This ownership dimension is recognised in the statement of financial position, where afinance-leased asset must be capitalised(as a non-current asset), together with the amount of theobligationsto make lease payments in future periods (as a liability). 1.1.3Operating lease: (a)An operating lease is arental agreementwhere several lessees are expected to use the leased asset and so the lease period ismuch shorter than the asset’s useful economic life. (b)Maintenance and similar costs are borne by the lessor, with this cost being reflected in the lease rentals charged. (c)An operating lease can usually becancelled without penalty at short notice. This allows the lessee to ensure that only up-to-date assets are leased for use in business operations,avoiding the obsolescence problemassociated with the
