Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of periodic payments Types of Lease
± Finance Lease ± Operating Lease ± Sales and Leaseback
finance lease or capital lease It is a commercial arrangement where: the lessee (customer or borrower) will select an asset (equipment, vehicle, software); the lessor (finance company) will purchase that asset; the lessee will have use of that asset during the lease;
the lessee will pay a series of rentals or installments for the use of that asset; the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee; the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price);
The finance company is the legal owner of the asset during duration of the lease. However the lessee has control over the asset during duration of the lease.
An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. Thus, for example, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease.
Sale and Leaseback
Leaseback, short for sale-and-leaseback, is a financial transaction, where one sells an asset and leases it back for a long-term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done for fixed assets, like real estate, and the purposes are varied, including financing, accounting, taxing.