How to choose whether to lease or buy equipment
Choose whether to lease or buy a piece of equipment only after you write how long it will be used, when cash leaves, who keeps the asset at the end, and who maintains it. Leave the choice blank until those four are written. This note does not give tax advice, and it does not quote a rent or a purchase price.
On this page
Write four facts before the choice
For each asset, write four facts: the dates you expect to use it, whether cash leaves at the start or across that use, who keeps the asset when use ends, and who handles maintenance and failure. Leave any of the four blank and the lease-or-buy mark on the decision record stays empty.
This note is about office and development equipment the company is preparing to use. How a lease is recorded in software is covered in How to choose an equipment rental management system. How the asset meets a system you already run is covered in How to connect equipment to existing business systems. Whether to proceed with the acquisition sits under Assessment, prototypes, and integration.
What the IFRS 16 page says
The IFRS 16 Leases page says the International Accounting Standards Board issued IFRS 16 in January 2016, replacing IAS 17. The page says IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019, with earlier application permitted if IFRS 15 is also applied. Its objective is to report information that faithfully represents lease transactions and gives users of financial statements a basis to assess the amount, timing, and uncertainty of cash flows arising from leases.
The same page says a lessee should recognise assets and liabilities arising from a lease. IFRS 16 uses a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. The lessee recognises a right-of-use asset for the right to use the underlying asset, and a lease liability for the obligation to make lease payments. The page does not state an amount for low value. This note does not fill one in, and it does not turn the paragraph into a tax conclusion. Whether the standard applies is for the person who owns the financial statements to judge from that page.
What the IAS 16 page says
The IAS 16 Property, Plant and Equipment page says the Board adopted IAS 16 in April 2001, that the International Accounting Standards Committee originally issued it in December 1993, and that it was revised in December 2003. The page does not print one publication date for the current consolidated text. The sentences above follow the history on that page.
The same page describes property, plant and equipment as tangible items held for use in the production or supply of goods or services, for rental to others, or for administrative purposes, and expected to be used during more than one period. It says the cost of an item is recognised as an asset only when it is probable that future economic benefits associated with the item will flow to the entity, and the cost of the item can be measured reliably. The item is initially measured at cost. Cost includes the purchase price, costs directly attributable to bringing the asset to the location and condition necessary for it to operate as management intends, and the estimated costs of dismantling, removal, and site restoration. This note does not measure that cost, and it does not quote a purchase price.
Keep the two term sentences apart
Write the expected start and end of use in your own dates. Keep the two official sentences apart. The IFRS 16 page talks about a lease term of more than 12 months. The IAS 16 page talks about expected use during more than one period. Neither page defines “one period” as 12 months.
While those dates are unwritten, leave the lease-or-buy mark empty. After the dates are written, put both sentences beside the same record, and have the person who owns the financial statements note which page they will read next. This note does not tick the mark for them.
Record when cash leaves
The IFRS 16 objective mentions the amount, timing, and uncertainty of cash flows. The decision record writes the timing only: whether cash leaves when the asset is obtained, or across an agreed period, and whether that period is the same start and end already written for use. Amounts stay in the working papers for the financial statements.
When the timing cannot be written, the contract still has no dates of use, or neither the purchase nor the lease yet has its payment rhythm in writing. Write that text first. This note does not compare which arrangement costs less.
Who keeps the asset, and who maintains it
When use ends, write whether the asset stays with the lessor, is returned, or remains with you. The IFRS 16 page describes the asset a lessee recognises as a right of use, and the liability as an obligation to pay. The IAS 16 page describes the recognised asset as the tangible item itself. Who keeps the underlying asset at the end has to match the page the finance owner is preparing to apply, and that person signs the note.
Neither page names who maintains the asset or who handles a failure. Write that person, or that supplier, on the decision record. While the name is blank, leave both lease and purchase unticked. How maintenance then meets a work order is covered in How to do predictive maintenance for equipment.
Tick the choice only after the four are filled
After the dates of use, the timing of cash, who keeps the underlying asset, and who maintains it each have a name and a date, the person who owns the financial statements writes which page this decision follows, the IFRS 16 page or the IAS 16 page, and the date they read it. The tick follows that line.
When both pages offer a sentence that could apply, and that person still cannot write which page they will follow, the tick stays blank. Keep both sentences and the reason for the blank on the record, and set another reading. This note does not treat either page as the better one.
When to leave the choice open
When the dates of use are unknown, maintenance has no name, or the question is a tax rate or a deduction, leave the lease-or-buy decision open. Hand a tax question to the person who owns tax, with the source they will cite. This note does not give tax advice.
This note does not state a rent, a purchase price, a residual amount, or a percentage saved. The IFRS 16 page states no amount for low value. Until a decision record exists, check the acquisition by whether the four facts are written, and whether the finance owner has named the page they are following and the date they read it.