LEASING- DEFINITION

A written agreement under which a property owner

allows a tenant to use the property for a specified

period of time and rent. The lessee (person taking out a lease) agrees to pay a number of fixed or flexible installments over an agreed period to the lessor, who remains the owner of the asset (item) throughout the period of the lease.

STEPS IN LEASING

FEATURES
Leasing a product is similar to renting it

A contract lasts over a number of years,

usually between 2 and 10, depending on the cost and usable life of the product. Have the full use of a piece of equipment without having to pay the full cost of the item

in one go.

TYPES OF LEASING
Lease

Finance lease

Operating lease

Sale and Lease Back

Leveraged leasing

Direct leasing

a)FINANCIAL LEASE (CAPITAL LEASE)

Long-term, non-cancellable lease contracts are known as financial leases. The essential point - it contains a condition whereby the lessor agrees 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 he has used at the expiry of the lease. High cost high tech equip.

 The lease agreement is irrevocable. All the risks incidental to the asset ownership are transferred to the lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor.

b) 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.

c) SALE AND LEASE BACK

Sub-part of finance lease

The owner of an asset sells the asset to

a party (the buyer), who in turn leases back the same asset to the owner in consideration of lease rentals. Under this arrangement, the assets are not physically exchanged but it all happens in records only.

 Sale and lease back transaction is suitable for those assets, which are not subjected depreciation but appreciation, like land.

The seller assumes the role of a lessee and the buyer assumes the role of a lessor.
The seller gets the agreed selling price and the buyer gets the lease rentals.

d) 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.

e) 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.

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.

 Tax advantages:
Budgeting: A fixed contract, it is relatively easy to budget and forecast with

Saving of capital
Improvement in liquidity:

 Flexibility and convenience The lease agreement can be tailormade in respect of lease period and lease rentals according to the convenience and requirements of all lessees

DISADVANTAGES
1. No Ownership 2. Costly option - high interest rates, costlier than straight buying 3. Long Term Expense

4. Maintenance
5. No working capital

LEASE AGREEMENT
A document under which a landlord and tenant set forth

the rights and obligations of each party with respect to

an apartment, rental unit, or other real property owned by the landlord and used by the tenant.

An instrument conveying the possession of real property for a fixed period in consideration of the payment of rent.

Clauses in lease agreement

Nature of the lease Description Delivery and redelivery Period

Lease rentals
Use Title

Repairs and maintenance

Alteration

DOCUMENTATION
Requirements Proof for indebtedness Evidence availability and enforceability of security Focus on the terms of lease

In case of default :company can take appropriate action

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

Accounting aspect of Leasing

Operating lease :
Is capitalized in the book of lesser
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 of the 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