Lease vs. Buy in the Age of ASC 842: Navigating Asset Acquisition for Optimal Financial Health

iLeasePro Lease vs Buy
Lease vs. Buy: Making the Right Decision for Your Business

The decision to lease or buy an asset is a crucial financial consideration for companies, especially in light of the ASC 842 lease accounting standard. This section delves deeper into the implications and initiatives surrounding the ‘Lease vs. Buy’ analysis.

Implication:

With the introduction of ASC 842, the way companies recognize lease liabilities has undergone a significant transformation. Before this standard, operating leases were off-balance-sheet items for lessees. However, ASC 842 mandates that lessees recognize almost all leases on their balance sheets, resulting in an increase in reported assets and liabilities. This can have several repercussions:

  • Financial Ratios: The increased liability can affect various financial ratios, such as the debt-to-equity ratio, which can impact a company’s perceived financial health.
  • Credit Ratings: A sudden surge in liabilities might affect the company’s credit ratings, potentially leading to higher borrowing costs.
  • Covenants: Companies might face challenges with loan covenants that have limits on liabilities or specific financial ratios.

Initiative:

Given these implications, it’s essential to approach asset acquisition with a strategic mindset. Here’s a detailed look at the ‘Lease vs. Buy’ analysis:

  • Cost Analysis: Begin by comparing the total cost of leasing versus buying. This includes not only the upfront costs but also long-term expenses such as maintenance, tax implications, interest on financed purchases, and potential lease escalations.
  • Flexibility vs. Ownership: Leasing often offers more flexibility, especially if the asset becomes obsolete quickly (like certain tech equipment). However, ownership means the asset can be deployed indefinitely, and the company can benefit from any residual value upon its sale.
  • Tax Benefits: Ownership allows companies to benefit from depreciation, which can be tax-deductible. Leasing, on the other hand, may allow for the deduction of lease payments, but this depends on local tax laws and the lease structure.
  • Cash Flow Considerations: Purchasing can tie up significant capital, whereas leasing might allow for better cash flow management, especially if there’s no down payment or it’s minimal.
  • Strategic Value: Consider the strategic value of the asset. If it’s core to the business operations and offers a competitive advantage, ownership might be more beneficial.

In conclusion, while the ASC 842 brings challenges, it also emphasizes the importance of thoroughly analyzing leasing versus buying decisions. By understanding the financial, strategic, and operational implications of each option, companies can make informed decisions that align with their long-term objectives and ensure tax and balance sheet efficiency.

iLeasePro ASC 842 Lease Accounting and Lease Management Solution

You can take a video tour of iLeasePro or schedule some time on our online demo calendar to see how iLeasePro can help you and your firm with the overall lease management of your lease portfolio.  For more information on increasing productivity and efficiency of your lease portfolio, check out our blog and our extensive lease accounting and lease management knowledge base.

If this guide proved beneficial, please share it with fellow colleagues or bookmark it for future reference. Keep an eye out for more deep dives into the intricate world of corporate taxes and how the ASC 842 Lease Accounting Standard impacts them.

Comments are closed.

Up ↑