Sub: Accounting Topic:
This means of financing has developed rapidly in the decades of sixties and seventies. At present thismeans of financing gained considerable importance due to its wide variety of applications and hasgained a substantial increase in the sheer volume of transactions. Although this type of financing canbe for long term, most lease financing is for periods of less than ten years. Under the subject of finance our concern is with financial leases rather than with operating leases. Hence we will studyhere about the financial lease.A lease is a means by which a firm can acquire the economic use of an asset for a specific period of time. A financial lease is a non cancelable contractual commitment on the part of a lessee to make aseries of payments to a lessor for the use of an asset. With the help of financial lease, the lesseerequires most of the economic values accruing to the outright ownership of the asset, even thoughlessor retains title to it. The financial lease period generally corresponds to the economic life of theasset. Further, the total payments the lessee agrees to make will exceed the purchase price of theset.In the financing, the nature of the obligations of the lessor and the lessee is specified in the leasecontract. The contract contains the following provisions.1.
The basic lease period during which the lease is non cancellable.2.
The timing and amount of periodic rental payments during the basic lease period3.
Any option to renew the lease or to purchase the asset at the end of the lease period4.
Provision for the payment of the costs of maintenance and repairs, taxes, insurance and theirexpenses
Forms of lease financing: