Own or Lease an Asset | UGC NET Commerce Preparation Course PDF Download

Ownership vs. Leasing Decisions

The decision-making process between owning and leasing assets is a pivotal strategic choice that businesses encounter when contemplating their capital expenditures. Below, we delve into the key points to consider for each option:

Benefits of Ownership:

• Long-term control: Owning an asset provides extended control over its use and management.
• Potential appreciation: Assets owned by a business may increase in value over time.
• Customization: Ownership allows for tailoring assets to meet specific requirements and preferences.

Considerations for Ownership:

• Upfront costs: Initial investment and acquisition expenses are required for ownership.
• Ongoing maintenance: Responsibility for maintenance and upkeep falls on the owner.
• Risk of depreciation: Assets may lose value over time, impacting the company's balance sheet.

Advantages of Leasing:

• Flexibility: Leasing offers agility in adapting to changing business needs and circumstances.
• Cost savings: Short-term financial benefits due to reduced initial expenses compared to ownership.
• Access to technology: Leasing enables businesses to utilize the latest technologies without significant upfront costs.

Considerations for Leasing:

• Equity building: Leasing does not contribute to the equity of the business as ownership would.
• Total cost implications: Over time, leasing might result in higher overall costs compared to ownership.

Meaning of an Asset

An asset refers to a valuable resource owned or controlled by an individual, corporation, or country, with the expectation of providing future benefits. Assets come in various forms, including tangible and intangible items. Tangible assets encompass physical items like real estate, machinery, equipment, and inventory, whereas intangible assets are non-physical items such as patents, trademarks, copyrights, and goodwill. Typically, assets are documented on a company's balance sheet, offering a snapshot of its financial standing at a specific moment.

Meaning of Tax Planning

Tax planning involves structuring your financial matters to minimize your tax obligations. It requires strategic decisions regarding your income, expenses, investments, and other financial transactions to ethically and legally reduce your tax liabilities. Effective tax planning aims to leverage available tax incentives, deductions, and credits while ensuring compliance with tax regulations.

What Is Own Or Lease An Asset?

Companies have the choice between owning or leasing an asset. When a company buys an asset, they gain full ownership of it. On the other hand, leasing involves a rental agreement where the company gets to use the asset without owning it outright. The decision between owning or leasing an asset is a crucial one for companies.

Own or Lease an Asset

• Sellers offer goods for a price, granting the buyer complete ownership. This ownership allows the buyer to use the asset at their discretion or even sell it. This fundamental transaction enables companies to utilize assets such as machinery or land.
• Rental or leasing agreements differ from outright purchases. The entity owning the asset is the lessor, while the entity utilizing it is the lessee.
• A leasing agreement only gives the lessee the right to use the asset for a specified duration.

Factors to Consider in Own or Lease Decision

• The decision to own or lease an asset should be made after a thorough analysis, considering its long-term financial implications.
• It allows companies to plan their cash flow and budget effectively.

What Is Buying Or Owning?

The decision to own or lease an asset involves buying, where the buyer acquires ownership of the asset. This means that the buyer becomes the owner.

Own or Lease an Asset

• The seller may sell an asset at a fixed price. This payment can be made either as a lump sum or through installment options.
• Upon completion of the payment, the ownership title is transferred, making the buyer the new owner.
• As the owner, one can utilize, rent, or lease the asset. It becomes part of the company's assets.
• There are various advantages and disadvantages associated with this decision. It involves a higher upfront cost and carries the risk of newer and better models entering the market.

The Importance of Own or Lease an Asset Decision
The decision to own or lease an asset is crucial for a company. Management must carefully consider the best course of action regarding owning or leasing an asset.

What Is Leasing?

Leasing involves a company renting a product for a specified duration, with the agreement outlining the time and cost involved.

Key Points about Leasing:

• The lessor and lessee agree to a contract that specifies the terms of use.
• The lessee must adhere to the lessor's instructions, and any damages incurred may result in additional charges.
• Upon the lease's expiration, the lessor can reclaim the asset, potentially leasing it to another party or extending the contract period.
• The agreement solely conveys usage rights, not ownership, meaning the lessee cannot claim ownership even after prolonged use.
• Leasing proves beneficial for small companies as it allows them to utilize assets without significant capital expenditure. Additionally, it facilitates the evaluation of different assets, aiding in making informed purchasing decisions.

Ultimately, choosing between owning and leasing an asset involves a thorough evaluation of company finances to determine the most suitable course of action for future needs.

Classification Of Leases

Understanding the various types of leases is crucial before deciding whether to own or lease an asset. This knowledge aids in making more informed decisions and allows management to select the most suitable lease option for their assets.

Financial Lease: 

A financial lease is a long-term agreement where all risks and rewards of the asset are transferred to the lessee. This type of lease cannot be canceled by either party. Ownership title may be transferred to the lessee in the future, but it remains with the lessor during the leasing period.
There are three main types of financial leases.

• Direct Lease: In a direct lease agreement, the manufacturer might directly deliver the asset to the lessee, acting as the lessor. Alternatively, another party could purchase the asset and lease it directly to the lessee. The lessee can accept the asset if it satisfies their requirements, typically by reviewing the product specifications to ensure it meets their needs.
• Leveraged Lease: A leveraged lease involves partially financing the purchase of an asset. The lessor contributes only a portion of the asset's cost while the remaining amount is covered through a loan or financial institution. The lessee makes payments directly to the lender or financial institution during the lease term, which reduces the lessor's capital expenditure. The lessor must cover the difference and continues to make payments until the loan is fully repaid. Payments are initially directed to the lender.
• Sale and Leaseback: In a sale and leaseback arrangement, a company sells its asset to another firm, usually a financial institution or investor, and then leases the same asset back from the buyer. This allows the company to receive immediate cash from the sale while retaining the right to use the asset. At the end of the lease term, the company can buy back the asset at the current market price. During the lease period, the lessee is responsible for maintenance costs.

Service Lease

Part of the own or lease an asset process involves a service lease, which is increasingly common. This type of lease includes servicing and maintenance costs within the lease agreement. This means that the lessor is accountable for service charges, which is particularly advantageous for assets like computers or machinery that require regular maintenance.

Characteristics of Service Lease:

• Lease Cancellation: This type of lease can be terminated, and the contract includes penalties for such cancellations. The party ending the lease must provide a cancellation notice.
• Maintenance Costs: The lessor is responsible for bearing the maintenance costs, which helps the lessee avoid expensive service charges for the leased assets.
• Short Service Lease Period: The duration of the service lease is shorter than the service life of the asset, which means that the revenue received may not cover the original cost of the asset.

Operating Lease

An operating lease involves the short-term use of an asset. The lessor leases the asset to the lessee for a brief period, after which it is returned. The lessor can then decide to lease the asset again or sell it, making it suitable for seasonal products or temporary needs.

• Own or Lease an Asset: Different lease types help companies determine the most suitable contract, whether for short-term or long-term leases. This decision-making process allows management to choose between owning or leasing an asset, emphasizing the need for a clear understanding to select the optimal lease agreement.
• Features of Budgetary Control: Budgetary control is a critical aspect of financial management that involves setting budgets, comparing actual results against the budgets, and taking corrective actions to achieve financial goals effectively.

Conclusion 

Deciding whether to own or lease an asset is a crucial choice for businesses. Understanding the advantages of each option is key. Ownership provides complete control over the asset and can be economically beneficial in the long term for core assets. On the other hand, leasing is advantageous when budget constraints are a concern and can facilitate product testing before committing to a purchase.