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F9:Lease v Buy (2)

ACCA F9考试 Lease v Buy
4 Effect on Financial Statements
When management makes a final decision on whether to borrow to buy an asset, or whether to acquire it under a lease, the respective financial accounting implications may be an important
factor.
This is certainly relevant for the managers of a listed company (i.e. whose shares are traded on the stock market) as key ratios may be influenced — particularly financial risk indicators such as the firm's debt to equity ratio and interest cover.
The implications of each financing option can be summarised as follows:
Borrow to buy: The bank loan (or bond) will be recorded in non-current liabilities and will hence increase the firm's reported level of financial gearing (debt to equity ratio).
Interest on the debt will reduce the firm's interest cover (i.e. earnings before interest and tax (EBIT) divided by interest expense). However, the overall effect also depends on the profits generated by the asset as these will increase EBIT and any retained profit would increase the level of equity.
Operating lease: Neither the asset nor any related liability would be shown in the statement of financial position.
Operating leases are a form of "off balance sheet" finance (although commitments under operating leases would be disclosed in the notes to the accounts). Therefore, reported financial gearing would not rise. Although rental expense would be charged against EBIT, this should be outweighed by the returns generated by operating the asset.
Finance lease: Both the asset and a related liability would be recognised in the statement of financial position (as for the borrow to buy option). Hence, reported financial gearing would initially rise. However, lease payments would be split between interest expense and repayment of principal and therefore the liability would amortise over time and ultimately、 fall to zero. Interest expense in early years would be relatively high, tending to reduce interest cover, but lower in later years.

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