Operating Lease vs. Finance Lease - Accounting theory and current issues

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Accounting theory and current issues

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Operating Lease vs. Finance Lease
As opined by Wong and Joshi (2015), the objective of The Australian Accounting Standards
Board prepares the accounting standard AASB 117 Leases is to prescribe appropriate accounting
policies and disclosures for lessors and lessees in order to apply for leases. There are two types
of leases namely Operating lease and Finance lease. Therefore, there can be two types of leases,
namely Finance lease and an Operating lease. Finance lease deals with providing finance in
which the lessor purchase the acids for the lessee and give them in rent for a specified period.
The lessor will retain the ownership of the asset but the lessee will be using as per the terms and
conditions of the lease. On the other hand, the lessee does not have any substantial risks and
benefits from the operating lease. The reason why companies categorize most of the leases
contract as operating lease as they provide flexibility to companies of replacing or updating the
assets as and when required. Operating lease payments are tax deductible, the accounting also
becomes easier and simpler. The companies falling under low bracket of tax, they are more
likely to classify any lease into operating lease. According to Bohušová (2015), the biggest
advantage of selecting operating lease by companies depends upon the lifespan of the asset. If
the asset’s lifespan is for a short period of time, an Operating lease is commonly preferred. Since
the asset will be only for a significant period of time, it will not attract higher rentals during the
lease period. Also, due to the ownership, the benefit lies in the hands of the leasing company to
take the risks and benefits. The leaves can either be mentioned in the books of accounts
especially in the balance sheet or not depending upon the accounting standards utilized.
The Positive accounting theory helps in predicting the real life events and converting them into
accounting transactions. This theory tries to understand the relationship between the various
managers, the company and accounting information within an economic framework. According
to this theory, the behavior of managers will require to change and as per the circumstances, they
must know how to select the appropriate accounting standards and policies to be used. However,
managers may try to maximize their own profit as they are considered to be economic rational
decision makers. But on the other hand, the companies will utilize the positive accounting theory
to sustain in the market and efficiently organize themselves.