Reference no: EM133743286

Question: Writers of leases, that is: lessors, are often willing to arrange for lease payments over the entire life of the asset, while creditors will want to protect themselves by requiring that the loan be completely repaid well before the end of the asset's life. Because of the increased protection of the lessor, an organization that needs an asset can often arrange a lease faster than a loan, and with divulgence of less information (Kieso et al., 2013). Leasing is also used when restrictive covenants limiting additional borrowing have been accepted as part of past financings. Since a lease is not technically a loan, a lease can sometimes be used when additional borrowing is not allowed.

With an operating lease, the lessor promises not just the asset, but the service. The lessee has the option of ceasing lease payments if the asset is not serviceable. While there is the potential for a lawsuit when payments are stopped, the burden of enforcing the contract is shifted to the lessor. Thus, the operating lease is a method of assuring quality. In short, obsolescence risk is not eliminated by the lease, but a lease is often a method of transferring that risk. Many leases give the lessee the option to cancel before the end of the lease, normally with some cancellation penalty (Borad, 2018; Ross et al., 2016).