Companies can either buy or lease assets it needs on a long-term basis. For example, a firm can buy a truck required for the business or lease the truck. A company usually leases a long-term asset if it either 1) does not have the money to buy it and 2) does not want to borrow the capital required to buy these assets. The business case should be the driver of this decision. Sometimes, companies may lease the asset because it does not have money to buy the asset or wants to avoid taking on more debt. The SEC has prescribed accounting rules that specify the conditions required to treat a lease as an operating expense or a capital item.

SEC regulations aside, we address how you should deal with operating leases when preparing cash flows for a DCF valuation on this page.

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