Lease Agreements: Option for Security Devices Inc.

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Table of Contents

Introduction
Discussion
Conclusion
Work Cited

Introduction

Leases are legal and binding contracts that outline the terms of an agreement between the leaser and the lessee. Leases are broadly classified as either operating or finance leases. While in operating leases, the lessor retains ownership of the asset and is recorded as expenses on the income statement in the lessee’s balance sheet, finance leases are long-term, where the lessee obtains ownership of the property through debt. Finance leasing would be the most feasible option for Security Devices Inc. (SDI) to avoid income statement effects that would disrupt its attempt to smooth income over time.

Discussion

The management of SDI would prefer to finance leasing contracts over operating lease agreements. In finance leasing, the leaser grants a long-term loan over the property, which the lessee obtains ownership at the end of the contract. Finance leases are recorded as debt; they do not influence the balance sheet, unlike short-term operating leases that are registered as expenses on the income statement (Morales and Ramirez 64). However, compliance with the International Financial Reporting Standards (IFRS) would make financial reporting challenging for SDI. Applying the IFRS is complex but worthwhile in making financial statements more understandable and comparable. Financial leasing would be the most probable choice for SDI management, although compliance with the IFRS would make financial reporting challenging.

Conclusion

Ultimately, the decision to classify lease agreements is necessary since it affects how leases are accounted for in financial statements. Capital and operating leases are the major classifications of lease agreements. While operating leases are short-term and influence the income statement, capital leases are long-term and do not affect the balance sheet. Financial leasing is the most viable for SDI, although compliance with IFRS would implicate their reporting objective.

Work Cited

Morales Díaz, José, and Constancio Zamora Ramírez. “IFRS 16 (leases) Implementation: Impact of Entities’ Decisions on Financial Statements.” Aestimatio: The IEB International Journal of Finance, vol. 17, 2018, pp. 60-97

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Lease Agreements: Option for Security Devices Inc.

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