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PREPARED BY:

Richa Gupta
MEANING OF LEASING
It may be defined as a contractual agreement/ transactions in
which a party owing an asset or equipment (lessor) provides the
asset for use to another/ transfer the right to use the equipment to
the user (lessee) over a certain/ agreed period of time for
consideration in form of/ in return for periodic payment (rentals)
with or without a further payment (premium).

“ Leasing separates ownership and use as two economic


activities and facilitates use without ownership.”
-Miller, M.H and C.W. Uptron
ESSENTIAL ELEMENTS OF
LEASING
A) Parties to the contarct
B) Asset
C) Ownership separated from user
D) Term of lease
E) Lease Rentals
F) Modes of terminating lease
STEPS INVOLVED IN LEASING

Lease Decision

Lease Agreement

Lease Delivery and


payment
HIRE PURCHASE
Hire purchase agreement is a peculiar kind of transaction in
which the goods are let on hire with an option to the hirer to
purchase them, with the following stipulations :

a) Payment to be made in installments over a specified period


b) The possession is delivered to the hirer at the time of entering into
contract
c) The property in the goods passes to the hirer on payment of the last
installment
d) Each installment is treated as hire charges so that if default is made in
payment of installment, the seller becomes entitled to take away the
goods
e) The hirer/purchaser is free to return the goods without being required
to pay any further installments falling due after the return.
DIFFERENCE BETWEEN HIRE
PURCHASE AND LEASING
Basis of Difference LEASING HIRE PURCHASE

1. OWNERSHIP Never transferred to Transferred to the hirer


lessee on the payment of last
installment.
2. Depreciation Charged in the books of Hirer is entitled to the
lessee depreciation shield on
assets hired by him
3. Magnitude of funds Very large Relatively low

4. Margin money It is invariably 100 In hire purchase margin


percent financing and equal to 20- 25 % of the
requires no margin cost of equipment is
money or immediate cash required to be paid by the
down payment by the hirer.
lessee
5. Maintenance In case of financial lease Cost of maintenance is
the maintenance cost is borne by the hirer
borne by lessee and in himself.
operating lease lessor
has to bear the
maintenance cost.

6. Right to Buy the Here the lessee has no The hirer has right to
goods right to buy the goods buy the goods at the end
of the period
TYPES OF LEASING
1. OPERATING LEASE
2. FINANCIAL LEASE
3. LEVERAGED LEASE
OPERATING OR SERVICE LEASE

1.An operating lease is a short term lease on period


to period basis. The lease period in such a
contract is usually less than the useful life of the
asset.
2. The lease is usually cancellable at the short
notice of the lessee.
3. The lessee usually has the option of renewing the
lease after the period of the expiry of lease
period.
CONTINUE……….
4. As is the short term cancellable lease, it implies
higher risk to the lessor but higher rentals to the
lessee.
5.The lessor is generally responsible for the
insurance, maintenance and the taxes of the
asset.
6.This type of the lease is common to the
equipments like computers, vehicles ,data
processing equipments, communication systems
etc…………
FINANCIAL LEASE
1.Financial lease are commonly used for leasing
land, building, machinery and fixed equipments.
2.As compared to operating lease, financial lease is
for longer period of time.
3.It is usually non cancellable by the lessee prior to
its expiration date.
4.The lessee is generally responsible for the
maintenance, insurance and the services of the
asset.
CONTINUE
5.A financial lease usually provides the lessee an
option of renewing the lease for further period at
a nominal rent.
LEVERAGED LEASE

1.A leveraged lease is an arrangement under which


the lessor borrows funds for the purchasing the
asset ,from the third party called lender which is
usually a bank or the finance company.
2. The loan is paid back out of the lease rentals,
may be directly by the lessee by paying the excess
amount to the lessor .
3. The lessor acts as the owner as well as the
borrower………..
ADVANTAGES OF LEASING TO THE
LESSEE(USER OF THE ASSET)

1.Avoidance of initial cash outlay


2.Easy source of finance
3.Shifting of the risk of obsolescence
4.Conserving borrowing capacity
5.Convenience and Flexibility
6.No disposal problem
7.Higher return on the capital employed
8.No floatation cost
LIMITATIONS TO
LESSEE(USER OF THE ASSET)
1.Risk of being deprived of the use of asset
2.No alteration or change in asset
3.Loss of ownership incentives
4.Penalities on termination of lease
5.Loss of salvage value of the asset
ADVANTAGES OF THE LEASING TO
LESSSOR(OWNER OF THE ASSET)
1. Higher profits
2. Tax benefits
3. Quick returns
4. Increased sales
LIMITATIONS FOR THE LESSOR
1.High risk of obsolescence
2.Competitive market
3.Price level changes
4.Increased cost due to loss of user benefits