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The previous chapter concluded from the surveys conducted by various authors and institutions that tax advantages as well as the advantage of off-balance sheet financing are the most frequently mentioned reasons for leasing. However, there are great differences between the corporate income tax systems and the accounting regulations of various countries, especially in Western Europe. That is why I shall discuss the principal corporate income tax and accounting aspects of leasing in some of the more prominent European countries: England, France, The Netherlands, the Northern European countries (Denmark, Finland, Norway, and Sweden), Switzerland, and West Germany (see Sections 7.3 and 7.4). In all of these countries, financial leasing of movables was introduced in the beginning of the sixties. Since in some cases the regulations issued by the tax authorities and the accounting profession are connected with the legal provisions, I shall first look into the legal aspects of leasing (Section 7.2). Paying attention to these issues is justified all the more as the above aspects are in fact part of the information required for making the lease-or-purchase decision in one of the Western European countries I shall be discussing.

Chapter 1 introduced the problem dealt with in this study and the firm’s goal assumed in trying to solve this problem. Chapter 2 states that leases have four characteristic features in common. First, any lease can be looked upon as a loan providing (almost) 100% financing of the leased asset’s purchase price. Second, the lessee obtains the right only to use the asset. Third, the lessor usually remains the asset’s owner, and fourth, the lease term corresponds with the expected service life of the capital asset. Because of these common features, I first defined the word leasing as such and then looked into the various types of leases. I thereby distinguished between financial and operating leases. With a financial lease, the risk of early obsolescence is largely borne by the lessee, whereas by entering into an operating lease this risk is transferred to the lessor. This is because after having concluded a financial lease contract the financial lessee is irrevocably committed to making the lease payments until at least the leased asset’s purchase price has been repaid to the lessor. On the other hand, an operating lease does not Involve such a fixed future commitment, since the operating lessee is allowed to continue leasing the asset if its operation turns out to be profitable (in some cases it is even allowed to purchase the asset) or to cancel the lease if the leased asset’s service life is considered to be at an end.

The requirements that models developed for choosing between leasing and purchasing should meet were discussed in Section 2.3. Based on these requirements, I shall now look into some of these models as recommended by various authors. For this purpose, I distinguish between lease-or-borrow models and lease-or-buy models (see Section 3.2). Next I shall discuss the methods of analysis I am going to use, my assumptions, and the data of my numerical example (Section 3.3). Then, in 3.4 and 3.5, I shall analyze a number of lease-or-borrow and lease-or-buy models.

This chapter goes into the meaning of the word “leasing” and into the distinction between financial and operating leases (Section 2.2). It also discusses five requirements that lease evaluation models have to meet (Section 2.3).

Before trying to develop a lease evaluation model that meets the requirements I–V as discussed in 2.3, I shall recapitulate the models examined in Chapter 3 with the help of these requirements. When developing this new model, I shall start from this recapitulation.