Financial Accounting Theory and Analysis, 15th Edition

13Leases

Businesses typically acquire property rights in long‐term assets through purchases funded by internal sources or externally by using borrowed funds. The accounting issues associated with the purchase of long‐term assets were discussed in Chapter 9. Leasing is an alternative means of obtaining long‐term assets for use by firms. Leases provide lessees with the right to use property, unlike purchases, which transfer property rights to the user of a long‐term asset. Lease terms generally obligate lessees to make a series of payments over a future period, making leases similar to long‐term debt. However, prior to 2019, if a lease was structured in a certain way, US GAAP allowed lessees to engage in off‐balance sheet financing because certain leases were not reported as long‐term debt on the balance sheet. This practice enabled business managers to improve the appearance of their companies' financial position. However, subsequent pronouncements by the FASB have significantly curtailed companies' ability to exclude lease liabilities from their financial statements. Overall, leasing offered a flexible alternative for acquiring long‐term assets, albeit with significant accounting implications.

Leasing has become a popular method of acquiring property because it typically requires no large initial cash outlay, unlike an outright purchase which often necessitates a substantial down payment. Leasing also has several other advantages:

1. It offers 100% financing at fixed rates. Leases ...