Municipal leasing entails the use of municipal leases. These are used to facilitate the process of equipment lease purchase. There are various definitions of this form of financing. It is essentially like renting a building for duration of time. Several other permanent assets can be leased including cars.
This method of financing has various advantages. It comes to the aid of individuals who are not willing and ready to spend liquid cash on the acquisition of noncurrent assets. They can use the assets without spending the cost of purchasing. The interest paid on the rentals is normally tax exempt. This means that the entity that incurs the interest would not pay taxes on them.
The limitations of this method arise when a comparison is made with the purchasing option. For an operating lease, there will be no ownership of the asset. This means that the lessee would not enjoy the rewards as a result of owning the asset. The upside of this is that one would not incur the capital maintenance costs that come with owning the asset.
The matter of leases has caused a lot of turmoil in the accounting profession. Even with the adoption of conclusive accounting standards to deal with the same, there are still unanswered questions about the entire matter. The management of companies has exploited the loopholes here to ensure that their companies are presented favorably.
The accounting treatment for leases differs depending on the type of lease. For a finance lease, the initial recognition requires that the leased asset be presented and property, plant and equipment. The corresponding credit entry is under liabilities under the title finance lease obligations. The subsequent measurement would be the depreciation of the asset and interest charging and reduction of the obligations as a result of the payment.
The treatment of an operating lease is relatively straightforward. No entry is made in the statement of financial position. The amounts paid are reflected as expenses in the income statement. There is a lot of room for creative accounting. Company directors without integrity may be tempted to classify finance lease assets under operating lease. The effect of this is that the gearing ratio of the company would improve tremendously. This off balance sheet financing tends to misinform users of financial statements.
The use of municipal leasing as an off balance sheet finance is illegal. Public interest companies are normally audited. Auditors would give a qualified opinion if they discover this.
This method of financing has various advantages. It comes to the aid of individuals who are not willing and ready to spend liquid cash on the acquisition of noncurrent assets. They can use the assets without spending the cost of purchasing. The interest paid on the rentals is normally tax exempt. This means that the entity that incurs the interest would not pay taxes on them.
The limitations of this method arise when a comparison is made with the purchasing option. For an operating lease, there will be no ownership of the asset. This means that the lessee would not enjoy the rewards as a result of owning the asset. The upside of this is that one would not incur the capital maintenance costs that come with owning the asset.
The matter of leases has caused a lot of turmoil in the accounting profession. Even with the adoption of conclusive accounting standards to deal with the same, there are still unanswered questions about the entire matter. The management of companies has exploited the loopholes here to ensure that their companies are presented favorably.
The accounting treatment for leases differs depending on the type of lease. For a finance lease, the initial recognition requires that the leased asset be presented and property, plant and equipment. The corresponding credit entry is under liabilities under the title finance lease obligations. The subsequent measurement would be the depreciation of the asset and interest charging and reduction of the obligations as a result of the payment.
The treatment of an operating lease is relatively straightforward. No entry is made in the statement of financial position. The amounts paid are reflected as expenses in the income statement. There is a lot of room for creative accounting. Company directors without integrity may be tempted to classify finance lease assets under operating lease. The effect of this is that the gearing ratio of the company would improve tremendously. This off balance sheet financing tends to misinform users of financial statements.
The use of municipal leasing as an off balance sheet finance is illegal. Public interest companies are normally audited. Auditors would give a qualified opinion if they discover this.
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