Operating Lease: Financial Impact and Management Strategies

This report delves into the intricacies of operating leases, providing a comprehensive analysis of their financial implications and operational impacts. The report begins by defining operating leases and contrasting them with ownership models, highlighting the transfer of control and responsibilities. It explores the changes expected in fleet control, including the maintenance of depreciation schedules, the handling of initial costs, and the implications of mileage control. Furthermore, the report examines the impact of operating leases on wear and tear allowance claims and ownership changes. It also addresses how the operating lease model can adapt to sudden changes in demand, management concentration, market conditions, and staff requirements. The report concludes with a discussion of the benefits and drawbacks of operating leases, supported by relevant references.

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Operating Lease
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Table of Contents
Introduction..............................................................................................................................................3
Changes expected in control of the fleet..........................................................................................3
Maintenance of depreciation schedule.........................................................................................3
Payment of the initial cost................................................................................................................3
Mileage control....................................................................................................................................3
Wear and tear allowance claim........................................................................................................3
Change in ownership.........................................................................................................................4
How the model might meet sudden changes in demand..............................................................4
Change in management concentration.........................................................................................4
Response to changes in market conditions................................................................................4
Response to changes in staff requirements................................................................................4
References...............................................................................................................................................5

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Introduction
An operating lease is a contractual relationship between a renting company and
the owner of the property, whereby the renting business obtains the right to use a
property and in return make a monthly rental payment, (Giner & Pardo, 2017, p. 1886).
In this type of agreement, the lessee does not obtain the title of ownership of the
property.
Changes expected in control of the fleet
Maintenance of depreciation schedule.
In a lease agreement, the company does not own the property. Therefore, the
company is not entitled to record the depreciation expense on its balance sheet. The
residual value of the property is also transferred to the owner at the end of the lease
agreement, and the maintenance and control of the depreciation schedule are done by
the lessor, (McGraw, 2015).
Payment of the initial cost
The initial cost experienced by the company is a factor expected to change with
the case of leasing the vehicles. During buying, in which the company has the full
ownership of the fleet, the cost revolves around either complete purchase or payment of
the deposit, (Akbulut, 2017, p. 4). However, with leasing, the lessee only makes a down
payment, followed by a monthly rental fee.
Mileage control
A change in mileage control is highly anticipated for in case of changing the
control of the fleet. In a purchase which translates to full ownership of the fleet, there
are no mileage limits, (Cotei & Farhat, 2016, p. 175). The opposite is exact in leasing, a
case in which there are mileage limits and exceeding such leads to extra cost by the
company.
Wear and tear allowance claim
When the company buys and maintains its fleet, then it will maintain a
depreciation schedule, (McGraw, 2015). It will also be able to claim wear and tear
deductions. However, in an operating; lease, the ownership of the car remains with the
lessor. Hence the renting company may not be able to claim any capital deductions.

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Change in ownership
In a lease agreement, after the contract, the vehicles are either returned to the
dealer or bought as per the agreement, (Akbulut, 2017, p. 6). The renting firm may also
renew the contract. This is different from the ownership case whereby the company
decides what to do with the fleet.
How the model might meet sudden changes in demand
Change in management concentration
In a car hire program, the lessee may not be responsible for servicing and
maintaining the car, (McGraw, 2015). This makes the management to concentrate on
other administrative divisions. Therefore, the administration would not spend resources
and time in maintaining and servicing the rented car.
Response to changes in market conditions
With the new model of leasing, the company shall be more flexible to meet
various market changes. The company might shift to any dealer after the expiration of
an existing contract, (Akbulut, 2017, p. 7). This would enable the firm to adopt contracts
with fair prices.
Response to changes in staff requirements
Whenever a contract expires, a company may not be willing to renew the
contract, but rather develop new contacts with other companies, (Akbulut, 2017, p. 7).
The company may also change its staff composition by employing new drivers with
more skills.

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References.
Akbulut, D.H., 2017. The Effects of Operating Leases Capitalization on Financial
Statements and Accounting Ratios: A Literature Survey. In Regional Studies in
Economic Growth, Financial Economics and Management, pp. 3-10.
Cotei, C. & Farhat, J., 2016. The Leasing Decisions of Startup Firms. Review of Pacific
Basin Financial Markets and Policies, p.175.
Giner, B. & Pardo, F., 2017. Operating Lease Decision and the Impact of Capitalization
in a Bank-oriented Country. Applied Economics, 49(19), pp.1886-1900.
McGraw, S., 2015. Car Leasing vs. Buying, Which is Better?. [Online]
Available at: https://www.arnoldclark.com/newsroom/676-car-leasing-vs-buying-which-
is-better
[Accessed 30 October 2017].