17.1 : Leases and Lease Types

A lease is a legal agreement where the owner of an asset, the lessor, allows another party, the lessee, to use the asset for a specified time in exchange for regular payments. Leases are widely used for real estate, vehicles, and equipment, providing flexibility and cost management benefits for businesses and individuals.

Leases can be broadly categorized into operating and financial leases, each serving different needs and purposes. 

Operating leases are typically short-term agreements where the lessee rents an asset without acquiring ownership. These leases are well-suited for assets like vehicles, office furniture, or equipment needing frequent replacement or upgrades. The lessee benefits from reduced responsibility for maintenance and the flexibility to update or return the asset after the lease period.

Financial or capital leases are long-term arrangements where the lessee takes on most of the risks and rewards associated with asset ownership. In these agreements, the asset is treated as though it were owned by the lessee, often appearing as a capital item on the balance sheet. Finance leases usually include an option for the lessee to purchase the asset at the end of the term.

For instance, airlines like Delta Air Lines use finance leases to acquire planes. This strategy helps manage significant costs by spreading payments over time while treating the planes as owned assets for accounting purposes.

Choosing the appropriate type of lease enables businesses to maintain cash flow, adapt to changing needs, and access critical assets without significant initial investments. By leveraging leases strategically, companies can improve financial flexibility and ensure efficient use of resources.