a lease is a contact between the owner of an

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LEASING

A lease is a contact between the owner of anasset (the lessor) and the party desiring touse that asset (the lessee).

Definition

Leasing is a process by which a firm can

obtain the use of a certain fixed asset forwhich it must make a series of contractualperiodic tax deductable payments.


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ESSENTIAL ELEMENTS OF

LEASING

Parties to the contract

Asset

OwnershipTerm of Lease

Lease Rentals

Modes of Terminating Lease


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FEATURES

Leasing a product is similar to renting it

A contract lasts over a number of years, usually between2 and 10, depending on the cost and usable life of the

product.

Have the full use of a piece of equipment without havingto pay the full cost of the item in one go.


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CLASSIFICATION

Financial Lease and Operating Lease

Sales and lease back and Direct lease

Single investor lease and Leveraged lease

Domestic lease and International lease


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FINANCIAL LEASE (CAPITAL LEASE)

Long-term, non-cancellable lease contracts are known asfinancial leases.

The essential point - it contains a condition whereby the lessoragrees to transfer the title for the asset at the end of the lease

period at a nominal cost.

At lease it must give an option to the lessee to purchase the asset hehas used at the expiry of the lease.

High cost high tech equip.

The lease agreement is irrevocable.


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FINANCIAL LEASE CONTD

All the risks incidental to the asset ownership are transferredto the lessee who bears

the cost of maintenance,

insurance and repairs.

Only title deeds remain with the lessor.


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OPERATING LEASE

Contrast to the financial lease

A lease agreement gives to the lessee only a limited right

to use the asset.

The lessor is responsible for the upkeep and

maintenance of the asset.

The lessee is not given any uplift to purchase the asset

at the end of the lease period.


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LEVERAGED LEASING

A third party is involved beside lessor and lessee.

The lessor borrows a part of the purchase cost (say 8 0

%) of the asset from the third party i.e., lender

The asset so purchased is held as security against the

loan.

The lender is paid off from the lease rentals directly by

the lessee and the surplus after meeting the claims of the

lender goes to the lessor.


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DIRECT LEASING

Under direct leasing, a firm acquires the right to use

an asset from the manufacturer directly.

The ownership of the asset leased out remains with the

manufacturer itself.


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ADVANTAGES OF LEASING

No large outlay:

The cost is spread over a number of years; there is no need to pay the entire amount upfront.

Security:

The product is still owned by the leasing company, meaning that they have better security on

finance. Budgeting:

A fixed contract, it is relatively easy to budget and forecast with

Flexibility and convenience:

The lease agreement can be tailor- made in respect of lease period and lease rentals are

according to the convenience and requirements of all lessees Tax advantages

Improvement in liquidity

Saving of capital


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LEASE AGREEMENT

A document under which a landlord andtenant set forth the rights and obligations ofeach party with respect to an apartment,rental unit, or other real property owned bythe landlord and used by the tenant.

An instrument conveying the possession ofreal property for a fixed period inconsideration of the payment of rent.


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LEGAL ASPECTS OF LEASING

The lessor has the duty to Deliver the asset to the lessee

Authorize the lessee to use the asset

Leave the asset in peaceful possession

The lessee has the obligation to Pay the lease rentals

Protect the lessors title

Take reasonable care of the asset

Return the leased asset


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ACCOUNTINGASPECT OF

LEASING

Operating lease : Is capitalized in the book of lessor Lease payments are treated as income of the lessor and

expense of the lessee Depreciation of the assets should on the basis of normal

depreciation policy of the lessor for similar assets

Financial lease : Must be capitalized in the books of lessee

a) At the time of inception leased asset is shown as an asset of B/S ofthe lessee

Its VALUE = PV of the committed lease rentals

b)Payments are financial charges (expense in P/L) and principal amount(deducted from lease payable in B/S)

c)Leased asset is depreciated in the books of lessee


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a lease is a contact between the owner of an

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