Leasing is a form of long-term financing, where a subject (lessor) grants another (lessee) the right to use a specific commercial asset against the payment of a periodic rent. The grantor (e.g. a bank) retains ownership of the asset throughout the leasing period or beyond, depending on the terms of the contract.

There are various categories of leasing for which different tax treatments apply, also established on the basis of the contractual relationship between the two parties.

Source: Dolenc, P. & Stubelj, I. 2011. Poslovne finance s praktičnimi primeri. Ljubljana.

There are two main categories of leasing, financial leasing and operating leasing. These are distinguished according to the duration, the amount of the rent, the possibility or not of terminating the contract, the inclusion or otherwise of maintenance costs, the impact on the accounting, etc.

Operating leasing usually means a contractual relationship with which the lessee rents the leased asset for a shorter period of the economic life of the asset (operating leasing is therefore similar to a long-term rental). In some cases the rent may also include additional services, such as maintenance costs and normally the leasing fee is not sufficient to cover the cost of redeeming the asset. Therefore at the expiration of the contract the lessee does not become owner of the asset, but can choose whether to redeem it by paying a redemption price equivalent to the value of the asset on the market. In the operating lease, the lessor remains the economic and legal owner of the asset and enters it in the assets of its balance sheet (and calculates the depreciation rates), while the lessee does not recognize these assets in its balance sheet, but recognizes the leasing fee which is usually deductible from business income.

Financial leasing, on the other hand, has a longer duration, which approaches the economic life of the asset, similarly to long-term financing. This type of leasing usually does not provide for the termination of the contract and upon its expiry, the lessee acquires full ownership of the asset by redeeming it against payment of a predetermined price. In financial leasing, the lessee is considered the economic owner of the asset, while the lessor remains the legal owner of the asset. The user recognizes the leased asset in his balance sheet (and calculates the depreciation), while the interest on the rent is accounted for as a liability.

Source: Dolenc, P. & Stubelj, I. 2011. Poslovne finance s praktičnimi primeri. Ljubljana.

Establishing the convenience of the leasing vis a vis the purchase or vice versa is impossible: from time to time it is necessary to evaluate the specificity of the case by comparing two comparable offers. However, it is good to keep in mind that, in fact, operating leasing is equivalent to a long-term rental, while financial leasing is equivalent to a form of long-term financing.

 Having to choose between the leasing and the purchase of an asset, consider that if the present value of the costs of the leasing is in absolute terms less than the net present value of the costs of ownership, then leasing is the more convenient between the two. Of course it goes without saying that before embarking on a lease, the contract must be read carefully, paying particular attention to the type of leasing and any ancillary charges, such as maintenance costs, and the clauses relating to economic property, depreciation must be carefully evaluated , as well as the option and any redemption price. Below you can see an example of a basic comparison between leasing and purchase.

Practical example.

Source: Dolenc, P. & Stubelj, I. 2011. Poslovne finance s praktičnimi primeri. Ljubljana.

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