) Operating leases are rental agreements between lessor and lessee where the lessor avails an
equipment and is responsible for serving and maintaining it. The period of leasing is usually
shorter than the expected life of the asset, such that after the lease the lessor can use it for
something else. Operating leases are recognized as prescribed in IAS 17 (Accounting for leases)
with the Lessor recognizes the asset in his balance sheet while the lessee recognizes the expense
of the lease.
If a business wants an equipment for a short period operating leases are ideal. The business will
have a required equipment for the required time while the lessor will get lease rentals for the
equipment which he is not using. This type of leasing is common in Zimbabwe especially in cars
and construction equipment. Assets financed under operating lease are not included in the
balance sheet of the lessee, however the cost of the lease is treated as an expense in the statement
of comprehensive income.
Operating lease as a source of funding of capital assets are common in Zimbabwe however there
are a number of considerations like certainty budgeting, fixed rate finance, the effect of security ,
maximum finance and tax advantages. Leasing are usually medium term funding facilities and
cannot be withdrawn as long the lessee makes his payments as the fall due. Uncertainty that is
usually comes with other funding facilities like overdrafts are removed. However leasing which
are long term can be costly as they cannot be terminated early.
Operating lease agreements comes with fixed lease payments which hep the leasing business
(lessor) with fixed consistence cash flows which is essentially in financial planning. The business
can budget using the future cash inflows for a long period. This is also helps the lessee as he will
know what he is going to pay for the duration of the use as the asset as the payments has fixed
rates. However in some operating lease agreements variable rate can be used which can make it
difficult to budget.
Leasing gives the finance company better security than other lenders like overdrafts and loans as
the finance company retains the legal ownership of the equipment. For example if a business is
giving a loan with repayment period of 10 years and after 5 years the company goes bankruptcy
the financing company might not get paid back the loan, but with leasing the asset will remain in
the finance company’s ownership.
Leases can cover the full cost of equipment. However, for leases, he may require one or more
advance payments. It may be possible to trade other assets owned by the company to raise
advance payments. Installments and leases allow companies to choose how to claim capital
deductions. If the company is profitable, it can claim its own capital deduction through an
installment purchase or outright purchase. If you are not taxable or pay corporate tax at the small
business tax rate, leasing may be more profitable for your business. The leasing company claims
a capital deduction and passes the profits on to the company in the form of reduced rents.