Operating Lease And Type Of Agreement †MyAssignmenthelp.com

Question: Discuss about the Operating Lease And Type Of Agreement. Answer: Introduction An operating lease is a contractual relationship between a renting company and the owner of the property, whereby the renting business obtains the right to use a property and in return make a monthly rental payment, (Giner Pardo, 2017, p. 1886). In this type of agreement, the lessee does not obtain the title of ownership of the property. Changes expected in control of the fleet Maintenance of depreciation schedule. In a lease agreement, the company does not own the property. Therefore, the company is not entitled to record the depreciation expense on its balance sheet. The residual value of the property is also transferred to the owner at the end of the lease agreement, and the maintenance and control of the depreciation schedule are done by the lessor, (McGraw, 2015). Payment of the initial cost The initial cost experienced by the company is a factor expected to change with the case of leasing the vehicles. During buying, in which the company has the full ownership of the fleet, the cost revolves around either complete purchase or payment of the deposit, (Akbulut, 2017, p. 4). However, with leasing, the lessee only makes a down payment, followed by a monthly rental fee. Mileage control A change in mileage control is highly anticipated for in case of changing the control of the fleet. In a purchase which translates to full ownership of the fleet, there are no mileage limits, (Cotei Farhat, 2016, p. 175). The opposite is exact in leasing, a case in which there are mileage limits and exceeding such leads to extra cost by the company. Wear and tear allowance claim When the company buys and maintains its fleet, then it will maintain a depreciation schedule, (McGraw, 2015). It will also be able to claim wear and tear deductions. However, in an operating; lease, the ownership of the car remains with the lessor. Hence the renting company may not be able to claim any capital deductions. Change in ownership In a lease agreement, after the contract, the vehicles are either returned to the dealer or bought as per the agreement, (Akbulut, 2017, p. 6). The renting firm may also renew the contract. This is different from the ownership case whereby the company decides what to do with the fleet. Change in management concentration In a car hire program, the lessee may not be responsible for servicing and maintaining the car, (McGraw, 2015). This makes the management to concentrate on other administrative divisions. Therefore, the administration would not spend resources and time in maintaining and servicing the rented car. Response to changes in market conditions With the new model of leasing, the company shall be more flexible to meet various market changes. The company might shift to any dealer after the expiration of an existing contract, (Akbulut, 2017, p. 7). This would enable the firm to adopt contracts with fair prices. Response to changes in staff requirements Whenever a contract expires, a company may not be willing to renew the contract, but rather develop new contacts with other companies, (Akbulut, 2017, p. 7). The company may also change its staff composition by employing new drivers with more skills. References. Akbulut, D.H., 2017. The Effects of Operating Leases Capitalization on Financial Statements and Accounting Ratios: A Literature Survey. In Regional Studies in Economic Growth, Financial Economics and Management, pp. 3-10. Cotei, C. Farhat, J., 2016. The Leasing Decisions of Startup Firms. Review of Pacific Basin Financial Markets and Policies, p.175. Giner, B. Pardo, F., 2017. Operating Lease Decision and the Impact of Capitalization in a Bank-oriented Country. Applied Economics, 49(19), pp.1886-1900. McGraw, S., 2015. Car Leasing vs. Buying, Which is Better?. [Online] Available at: https://www.arnoldclark.com/newsroom/676-car-leasing-vs-buying-which-is-better [Accessed 30 October 2017].