Page 232 - DCOM508_CORPORATE_TAX_PLANNING

Unit 10: Tax Consideration in Specific Managerial Decisions

Notes

Notes This framework has some obvious advantages, listed below:

(i) It is conceptually simple for managers to grasp, since it specifi es situations easily
understood in any business environment.

(ii) All make-or-buy decisions, irrespective of item/service attributes, fall clearly into
one of the three categories.
(iii) The limited number of categories included in the framework enables analysis by
statistical methods and facilitates interpretation of the fi ndings.

10.1.5 Buy or Lease Decision

An entity’s non-financial assets can be acquired either through outright purchase or leasing

arrangements. When making a ‘lease or buy’ decision an entity must not only consider the

financial implications of the options including the government’s procurement criterion relating
to ‘value for money’, but consideration must also be given to long-term strategic priorities and
to qualitative factors. It is important to understand the implication of both options for the service
delivery needs of the entity when determining the most appropriate option.
When leasing an asset the entity only pays for the use of the asset over the term of the lease
and ownership of the asset does not pass to the entity at any stage unless the lease contract

specifically states it. Leases where substantially all the risks and rewards incidental to ownership
are transferred are usually classifi ed as finance leases. When buying an asset, the entity pays the

full cost of the asset at acquisition date and has full ownership over the asset.
A finance lease is recorded as an asset when the transaction (contract) is entered into and, similar

to the outright purchase option, will give rise to depreciation expense as would be the case of
other assets controlled by the entity. If there is no reasonable certainty that the lessee will obtain
ownership by the end of the lease term, the asset is required to be fully depreciated over the lease
term or its useful life, whichever is shorter.
An operating lease on the other hand, will usually specify a period over which an entity will have
the right to use the goods, and have them replaced if they stop working during the lease period,
but will then return the goods to the lesser at the end of the lease.
Better practice entities will usually undertake a risk assessment and cost benefit analysis to

assess the implication of the operating lease vs. finance lease vs. outright purchase decision when

considering key asset acquisitions.
Assessment of Advantage and Disadvantages

The table 10.1 below outlines the advantages and disadvantage of buying and leasing options to
assist entities in considering the most appropriate option for their circumstances.
The decision to either lease an asset or purchase it outright not only requires consideration of
the broad advantages and disadvantages outlined above, but also requires an analysis of the
financial implications of the decision. Financial parameters, such as the interest rate which may

be charged on the financed amount as well as the implied opportunity cost of using the entity’s

own cash resources, may have a significant impact on the lease versus purchase decision.

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