On one hand leasing offers various advantages to both lessor and lessee, but on the other hand it also has some limitations. Now let us try to visualize these limitations
Restrictions on use of limitations: Under a lease agreement, sometimes restrictions are imposed related to uses, alteration and additions to asset even though it may be essential for the lessee.
Limitations of Financial Lease: A financial lease may entail a higher payout obligations, if the equipment is found not useful and the lessee opts for premature termination of the lease. Besides, the lessee is not entitled to the protection of express or implied warranties since he is not the owner of the asset.
Loss of Residual Value: The lessee never becomes the owner of the leased asset. Thus, he is deprived of the residual value of the asset and is not even entitled to any improvements done by the lessee or caused by inflation or otherwise, such as appreciation in value of leasehold land.
Consequences of Default: If the lessee defaults in complying with any terms and conditions of the lease contract, the lessor may terminate the lease and take over the possession of the leased asset. In case of finance lease, the lessee may be required to pay for damages and accelerated rental payments.
Understatement of Lessee’s assets: Since the leased asset do not form part of lessee’s assets, there is an effective understatement of his assets, which may sometimes lead to gross underestimation of the lessee. However, there is now an accounting practice to disclose the leased assets by way of footnote to the balance sheet.
Double sales tax: With the amendment of sales tax law of various states, a lease financing transaction may be charged to sales-tax twice – once when the lessor purchases the equipment and again when it is leased to the lessee.