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A lease is a contract calling for the lessee (user) to pay the lessor (owner) for use of an asset. A rental agreement is a lease in which the asset is tangible property. Leases for intangible property could include use of a computer program (similar to a license, but with different provisions), or use of a radio frequency (such as a contract with a cell-phone provider). A lease agreement may be used to acquire an fixed asset that is used by the business. A business may acquire a right to use a vehicle or piece of machinery through such an agreement, in which case it may be treated as an asset of the business. A contract of lease may also be defined as A contract whereby the owner of an asset grants to another party , the exclusive right to use an asset usually for an agreed period of time in return for the payment of rent . In other words, a contract of lease provides a person an opportunity to use an asset which belongs to another person. The lessee uses the asset purchased by a finance company (bank). Essential Elements of Leasing: y There are two parties involved in the contract of lease. The owner of an asset is known as a lesser and the user of an asset is known as lessee . y The asset, property, or equipment to be leased is the subject matter of a contract of lease financing. y With a lease there is often no agreement for legal ownership of the asset to pass to the lessee. y The lessee makes hire/rental payments to the company during the period of the lease. This is known as lease rental. y The term of lease is the period for which the agreement of lease remains in operation. Every lease should have a definite period; otherwise it will be legally inoperative.
the lessor provides an equity portion (often 20% to 50%) of the equipment cost and lenders provid e the balance on a nonrecourse debt basis. etc.) being leased. . for example. finances the purchase of the asset being leased. who makes payments to the lender. An operating/operational lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner. Under the loan agreement. an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease. by borrowing funds from a lending institution. The term may also refer to a lease agreement wherein the lessor. An operating lease is commonly used to acquire equipment on a relatively short-term basis. Leveraged Lease: A leveraged lease is a lease in which the lessor puts up some of the money required to purchase the asset and borrows the rest from a lender.y The lease is terminated at the end of the lease period and various courses are possible such as renewal. In this type of lease. The lessor receives the tax benefits of ownership. etc. Operational lease: It is short-term and where the asset may be hired to several lessees. Types of lease agreement: There are five categories of lease which are as follows: 1. revert. the lender has rights to the asset and the lease payments if the lessor defaults. sale. 2. The lender is given a senior secured interest on the asset and an assignment of the lease and lease payments. The lessee makes payments to the lessor. Thus. a ship. The lessor pays the lending institution back by way of the lease payment s received from the lessee. The lessee does not have to show the lease on their balance sheet.
Sale and lease back transaction is suitable for those assets. This is nothing but a paper transaction. y y y y y The finance company is the legal owner of the asset during duration of the lease. However. who in turn leases back the same asset to the owner in consideration of lease rentals. 4. the owner of an asset sells the asset to a party (the buyer). the lessor (finance company) will purchase that asset. However the lessee has control over the asset providing them the benefits and risks of (economic) ownership . which are not subjected depreciation but appreciation. A finance lease or capital lease is a type of lease. vehicle. say land. the lessee has the option to acquire ownership of the asset (e.g. 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. Finance /capital lease: Finance lease which is long term and where the asset is hired to only one lessee. software). the lessee will have use of that asset during the lease. It is a commercial arrangement where: y the lessee (customer or borrower) will select an asset (equipment. under this arrangement. paying the last rental. Under this. the lessee will pay a series of rentals or installments for the use of that asset. or bargain option purchase price). Sale and Lease back: It is a sub-part of finance lease. the assets are not physically exchanged but it all happens in records only.3. .
with the responsibility for the lease lying with the employee and the lease payments being made from the employee's pre -tax income. the employer then makes the lease payments on behalf of the employee. or subtenant. a novated lease is generally a three way agreement ("novation agreement") between an employer. Sub lease: In real estate law. and employer agrees to take on the employee's obligations under the lease. Benefits of leasing: The basic advantage of leasing are as follows: . This means you are renting and renting out the same property at the same time. The management company is said to sublet the property to the individual tenants by means of a sublease. In this event. 6. Novated lease: A novated lease is a type of motor vehicle lease common in Australia that allows a business to lease a motor vehicle on behalf of an employee. and the individual tenants are subtenants or sublessees. sublet) is the name given to an arrangement in which the lessee in a lease assigns the lease to a third party. and deducts them out of the employee's pre-tax income (known as salary packaging a vehicle). thereby making the old lessee the sublessor. This company may then sublease parts of the building to other people. the owner of an office building may lease the whole building to a management co mpany. the management company (which was previously the lessee unde r the original lease) becomes the sublessor. under which the employee leases a vehicle from the lease company. The term novated lease is also used in the UK to refer to a car lease which has been novated (transferred) between two parties. Normally.The advantage of this method is that the lessee can satisfy himself completely regarding the quality of the asset and after possession of the asset convert the sale into a lease arrangement 5. employee and lease company. less formally. sublease (or. and the new lessee the sublessee. In Australia. For example.
In the balance sheet the liability for future lease payments is shown accordi ng to current and long term liabilities. The starting date and duration of the agreement. 7. Absence of restrictive covenant (agreement). Identifies the specific object (by street make/model. 3. Protection against obsolescence Increases lessee s capacity to borrow. 2. Invisible privileges (rights). The interest due is not shown as a liability Lease Agreement: A Lease is a legal contract. 5. Arrangement of faster and cheaper credit. 8. Net book value is cost price less provision for depreciation. and/or the jurisdiction in which the agreement was signed or the residence of the parties.serial number) being leased. Trading on tax shield. Provides conditions for renewal or non-renewal. Accounting Treatment for leasing : In the balance sheet the cost price. 4. VIN. Common elements of a lease include: y y y Names of the parties of the agreement. In the profit and loss account the interest for the year is shown together with any depreciation. and thus enforceable by all parties under the Contract Laws of the applicable jurisdiction. Some specific kinds of leases may have specific clauses required by statute depending upon the property being lease. Boon for small firms.1. 6. since it also represents a conveyance of possessory rights to real estate. Alternative use of funds. or y . But. excluding interest is shown. address. it is a hybrid sort of contract that involves qualities of a deed.
As a result of the lease.. apartments. furniture. May have other specific conditions placed upon the parties such as o y y y need to provide insurance for loss restrictive use which party is responsible for maintenance o o All kinds of personal property (eg: cars. single family homes.y Has a specific consideration (a lump sum. Has provisions for a security deposit and terms for its return. the owner (lessor) grants the use of the stated property to the lessee. and business property (including wholesale and retail)) may be leased. . or periodic payments) for granting the use of this object. May have a specific list of conditions which are therein described as Default Conditions and specific Remedies..) or real property (raw land..
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