Pricing the lease during the contract an inprogress approach to lease evaluation

• Published in: Managerial finance Vol. 35; no. 10; pp. 841 - 859
• Main Authors: Carretta, Alessandro, Nicolini, Gianni
• Format: Journal Article
• Language: English
• Published: Emerald Group Publishing Limited 28.08.2009
• Subjects: Accounting valuations; Contracts; Leasing; Pricing
• DOI: 10.1108/03074350910984719
• ISSN: 0307-4358

Purpose Leasing evaluation is a subject that has drawn significant interest in economic circles for many years. The numerous models proposed in the literature have approached the topic from a variety of outlooks and approaches. The contributions made to date, however, all share what would appear to be an unwritten premise namely, that leasing evaluation logically occurs prior to the start of the leasing relationship. The purpose of this paper is to eliminate this premise, in order to take an inprogress approach to the evaluation of leasing. Designmethodologyapproach The evaluation approach is based on a model that takes into account both the real factors the market value of the asset and the financial aspects of the lease interest rates on the market. The leasing price is arrived at by taking the sum of the advantage offered by the leasing, as compared to potential purchase of the asset on the spot market and the added yield provided by the leasing, as compared to alternative investments. Findings The paper finds that an inprogress approach allows measurement of the value of a leasing even if the lessor and the lessee have already decided to initiate the leasing relationship. This approach is called for when one of the parties the lessor or the lessee is replaced, as well as in cases where pathological situations lead to the interruption of the relationship, plus instances where it is necessary to carry out estimates for accounting purposes. The need to evaluate the leasing in terms of its different components real and financial also emerges from the instructions contained in the IAS17 regarding leasing. Originalityvalue The contribution of the work to the leasing evaluation theme can be identified in a different perspective that can be useful both in a financial point of view and in an accounting one.