SAINTGITS INSTITUTE OF MANAGEMENT

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Kottayam By Ms. Lekshmi Vijayan Ms. Rini Sara Zacharia

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.

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STEPS IN LEASING .

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depending on the cost and usable life of the product. usually between 2 and 10. • Have the full use of a piece of equipment without having to pay the full cost of the item in one go. .FEATURES • Leasing a product is similar to renting it • A contract lasts over a number of years.

TYPES OF LEASING Lease Finance lease Operating lease Sale and Lease Back Leveraged leasing Direct leasing .

• At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease.a)FINANCIAL LEASE (CAPITAL LEASE) • Long-term. non-cancellable lease contracts are known as financial leases. .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. • High cost high tech equip. • The essential point .

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

. • The lessee is not given any uplift to purchase the asset at the end of the lease period.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.

. who in turn leases back the same asset to the owner in consideration of lease rentals.c) SALE AND LEASE BACK • Sub-part of finance lease • The owner of an asset sells the asset to a party (the buyer). • Under this arrangement. the assets are not physically exchanged but it all happens in records only.

. which are not subjected depreciation but appreciation.• Sale and lease back transaction is suitable for those assets. like land. • The seller gets the agreed selling price and the buyer gets the lease rentals. • The seller assumes the role of a lessee and the buyer assumes the role of a lessor.

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. • The lessor borrows a part of the purchase cost (say 8 0 %) of the asset from the third party i. • 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. .d) LEVERAGED LEASING • A third party is involved beside lessor and lessee. lender • The asset so purchased is held as security against the loan.

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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. .e) DIRECT LEASING • Under direct leasing.

. meaning that they have better security on finance. there is no need to pay the entire amount upfront.ADVANTAGES of LEASING • No large outlay:  The cost is spread over a number of years. • Security:  The product is still owned by the leasing company.

• 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 .

No Ownership 2. Maintenance 5. No working capital . Long Term Expense 4. Costly option .DISADVANTAGES 1. costlier than straight buying 3.high interest rates.

rental unit.LEASE AGREEMENT • A document under which a landlord and tenant set forth the rights and obligations of each party with respect to an apartment. 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 .

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