Financial Accounting: In an Economic Context

LEASES

A lease is a contract granting use or occupation of property during a specified period of time in exchange for rent payments. Such contracts are a very popular way to finance business activities. Companies often lease rather than purchase land, buildings, machinery, equipment, and other holdings, primarily to avoid the risks and associated costs of ownership. Accounting Trends and Techniques (New York: AICPA, 2009) reports that, of the major U.S. companies surveyed, 99 percent disclosed some form of material lease arrangement. Many of the major retailers, for example, lease most of the facilities in which they conduct operations. The Limited stores are almost always leased for terms of ten years with multiple renewal options. The company's annual lease payments approximate $600 million. Forbes recently noted:

Today, about a third of all capital spending is financial via leases rather than through direct ownership. A quarter of a trillion dollars worth of capital investment is owned by the 100 top leasing companies, a 17% increase over last year.

Operating Leases

In a pure leasing (or rental) arrangement, an individual or entity (lessor) who owns land, buildings, equipment, or other property transfers the right to use this property to another individual or entity (lessee) in exchange for periodic cash payments over a specified period of time. Normally, the terms of the lease are defined by contract, and over the period of the lease, the owner is responsible for the property's ...