Discuss the economic advantages and disadvantages of leasing assets.

What will be an ideal response?

Answer: For the lessee, there are a number of advantages:
1. A lease can provide an opportunity for complete financing of an asset; therefore the lessee does not have to incur a significant outflow of cash up front.
2. Lessor bears the risk of obsolescence. This is reflected by higher lease payments. If a lessee is leasing equipment that is in an industry that is rapidly evolving, then it is advantageous to be able to upgrade to the latest technology.
3. Leasing provides a business with greater flexibility through extended payments, purchase options and other features without affecting existing lines of credit.
4. Leasing provides tax benefits. If a lessee leases equipment under an operating lease, it writes off the entire lease payment. By contrast, if it is buying the equipment, it writes off interest and depreciation. This especially important if the lessee is leasing real estate. The company cannot depreciate the land, but it can deduct the entire amount of the rent expense.
5. Leases classified as operating leases are not reflected on the balance sheet. This is a form of off-balance sheet financing. If a company already has a high debt to equity ratio, this can prevent a further increase and a possible violation of debt covenants.
Despite the numerous advantages, there are also disadvantages for the lessee. Overall, the total lease payments are typically higher than the cost of purchasing the asset. Also, unless there is a transfer of ownership at the end of the lease, the lessee does not own the property.