LEASING AND FINANCIAL STATEMENTS.
In recent years the lease has grown in popularity as a device lot financing the acquisition of productive property. The lease is a form of debt that does not appear on the balance sheet under current accounting practices. The omission from the balance sheet of the lessee's liability under long-term leases results in an understatement of the debt position of the firm and makes it more difficult to compare the financial position of firms that choose different means of asset financing. There is, fortunately, a sound basis for capitalizing the lease on the balance sheet. When the lessee enters into a lease, he obtains an asset and assumes a liability. The amount of the liability is the present worth of lessee's future payments under the lease, discounted at a rate of interest equal to the effective percentage yield-to-maturity cost of the lease financing device. The full value of the asset depends on how effectively the lessee puts the property to work during the period of the lease, but its cost is the sum that is given up in exchange for user rights. This cost can be approximated by subtracting from the alternative purchase price of the property the present worth of the end-of- lease ownership value. This net amount is also equal to the capitalized amount of the lessee's liability under the lease, so that the accounting entry to record the negotiation of a lease fits logically and neatly into the double entry bookkeeping system. These asset and liability values can then be amortized over the term of the lease in such a way as to leave net reported profit unchanged, but with a portion of the annul rental payment diverted to interest expense from the operating cost section of the income statement. It is maintained in this paper that this method of lease capitalization and amortization is entirely consistent with existing accounting principles for the valuation of assets and liabilities.
- DOI
- 10.2308/tar-7060779
- Volume
- 33 (4)
- Pages
- 581-592
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref