Leasing or Renting?
One of the accounting doubts that often make me more
companions of other companies is related to the accounting of renting and
leasing. Before attempting to explain in a clear and concise way how to account
for these leases, I am going to make a brief description of both concepts.
Renting can be considered as a rental contract through which
we lease a movable property for a certain duration, which in most cases exceeds
the year. In addition, a fixed monthly, quarterly or annual fee is agreed for
the duration of the contract.
Among the main characteristics of renting we can mention
that its use is not only restricted to companies, that the contracts are free
(they are governed by the provisions of the Civil Code and the Commercial
Code), which does not contemplate the option of purchase to the Termination of
the contract due to the excessive deterioration suffered by the good and that
the renting companies if they do not have the good in question in stock usually
buy it.
The characteristics presented above indicate that renting is
an excellent formula for acquiring fixed assets in those cases in which it is
not desired to increase business indebtedness, decrease cash positions or do
not want implicit financial cost (renting is not subject to expenses By
interests which entails financial neutrality).
For its part leasing is a financial lease agreement which
includes an option to purchase the asset received. With respect to the purchase
option we can indicate that normally its value coincides with the total amount
of installments paid up to the expiration of the contract, although it may be
mandatory.
Regarding the main advantages that the leasing presents with
respect to another type of acquisition we can mention that the quotas are
totally deductible in the Corporation Tax, the IVA will be accrued as the
service is rendered and it is also more accessible than a bank credit. The main
disadvantages of this type of operation will be the application interest rate,
which will generally be higher than any other type of financing and maintenance
and repair costs of the leased asset, which will have to be charged Holder of
the contract.
To conclude, we attach a brief comparison between leasing
and leasing so that in a more concise way we can see the differences between
these two types of leases:
- With regard to its purpose to indicate that the leasing
contract has the ultimate purpose of exercising the option of purchase of the
property by the lessee, hence this figure appears in the contract while on the
other hand renting although initially not Reflects the purchase option, the
contract holder may acquire the good by paying its residual value.
- With regard to the services offered by each of the figures
we can point out that through the leasing contract, the lessor does not bear
any of the expenses that may accrue as a result of the use of the property
while, Lessor will take care of the repair and maintenance services, insurance
premium and taxes related to the property in question.
- The accounting effects of both are also different, renting
will be accounted for as a lease expense while leasing will have to activate
the asset and create a credit balance. In the next entry we will detail the
notes to be made.
- The leasing contract will require a minimum duration of
two years for movable property, although a different duration can be stipulated
through an agreement between the parties. It has a medium- and long-term
orientation. For its part, the renting contract is more flexible in terms of
its duration adapting to the situation of the company, being oriented to the
short term.
- At the end of the lease, the lessee can choose between
three options, to return the property, to extend the contract or to execute the
purchase option while renting only allows two: the return of the property or
Extension of the contract.
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