Leases in the USA

B) Wright down six questions about the text.

A) Read the text and discuss what you know about leases in the USA.

A large fraction of America’s equipment is leased rather than purchased.

1. Leases can be separated into two polar types. Though operating leases allow the lessee to use the equipment, ownership remains with the lessor. although the lessor in a financial lease legally owns the equipment, the lessee maintains effective ownership because financial leases are fully amortized.

2. When a firm purchases an asset with debt, both the asset and the liability appear on the firm’s balance sheet. If a lease meets at least one of the number of criteria, it must be capitalized. This means that the present value of the lease appears as both an asset and a liability. A lease escapes capitalization if it is does not meet any of these criteria.Leases not meeting the criteria are called operating leases, though the accountant’s definition differs somewhat from the practitioner’s definition. Operating leases do not appear on the balance sheet. For cosmetic reasons, many firms prefer that an asset be called operating.

3. Firms generally lease for tax purposes. To protect its interests the IRS allows financial arrangements to be classified as leases only if a number of criteria are met.

4. Risk-free cash flows should be discounted at the after-tax risk-free rate. Because both lease payments and depreciation tax shields are nearly riskless, all relevant cash flows in the lease-buy decisions should be discounted at a rate near this after tax rate. We use the real-world convention of discounting at the after-tax interest rate on the lessee’s secured debt.

5. Though this method is simple, it lacks certain intuitive appeal. Relative to a lease, a purchase generates debt capacity. This increase in debt capacity can be calculated by discounting the difference between the cash flows of the purchase and the cash flows of the lease by the after-tax interest rate. The increase in debt capacity from a purchase is compared to the extra outflow at year 0 from a purchase.

6. If the lessor is in the same tax bracket as the lessee, the cash flows to the lessor are exactly the opposite of the cash flows to the lessee. Thus, the sum of the value of the lease to the lessee plus the value of the lease to the lessor must be zero. While this suggests that leases can never fly, there are actually at the least three good reasons for leasing:

a. Differences in tax brackets between lessor and lessee.

b. Shift of risk-bearing to the lessor.

c. Minimization of transaction costs.

But there is a number of bad reasons for leasing.

Words you may need:

to appear – показуватися, з’являтися

to escape – уникнути, позбутися

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