JAIIB | AFM | CASE STUDY ON LEASING AS A FINANCIAL DECISION

easing is a dynamic financial strategy, allowing businesses to acquire assets without the immediate cash outlay required for purchases. In the context of JAIIB’s Accounting and Financial Management (AFM) module, mastering the nuances of leasing as a financial decision is essential for banking professionals who evaluate clients’ financial strategies and assess credit risk. Learning Sessions offers this article exploring leasing from a financial decision-making perspective, covering the types of leases, benefits, potential drawbacks, and a relevant case study for JAIIB applicants.

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In simple terms, leasing is a contractual agreement between the lessor (owner of the asset) and lessee (user of the asset), where the lessor grants the right to use an asset for a specified period in return for periodic payments. This arrangement helps companies conserve capital, manage cash flows, and maintain operational flexibility. In outlining leasing as a financial decision, JAIIB applicants need to have knowledge about how lease agreements impact balance sheets, tax benefits, and financing strategies.

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Leasing decisions often come down to two main types of leases, each with distinct financial implications:

Operating Lease:

• Short-term leasing arrangement with the asset ownership and risk staying with the lessor.
• Financial Impact: Recognized as a rental expense in the income statement without recording the asset or liability on the lessee’s balance sheet.

Finance Lease (Capital Lease):

• Long-term lease transferring most of the asset’s economic benefits and risks to the lessee.
• Financial Impact: Recognized as both an asset and liability on the lessee’s balance sheet, with depreciation and interest expense recorded periodically.

To summarize, Leasing as a financial decision offers businesses the flexibility to access assets with manageable cash outflows, tax benefits, and improved financial metrics. The JAIIB AFM module equips banking professionals with critical insights into the accounting and strategic considerations of leasing, enabling them to better assess clients’ financial positions, credit needs, and cash flow management. Learning Sessions provides additional information about JAIIB AFM STANDARD COSTING by giving examples of real life scenarios.

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