Capitalizing Operating Leases

The principal advantages perceived by companies who enter into leases are: They are able to use the assets in their business without showing the related debt. Companies improve the utilization of their assets via leasing since they can add capacity, as needed, a lot more easily by leasing rather than committing to own the assets. They show no interest expense or depreciation in the income statement, although both of these are part of the lease expense account that does run through the income statement. They avoid certain ris s of ownership such as technological obsolescence, physical deterioration, etc. !f one of these situations arises, the may terminate the lease, although there may be a penalty involved. !f the lessee is in a lower marginal tax brac et than the lessor, leasing is advantageous to both parties. The lessor can ta e advantage of any accelerated depreciation tax shields available to them and some of this benefit is usually passed on to the lessee in reduced lease payments.