LEASING

A lease is a contact between the owner of an asset (the lessor) and the party desiring to use that asset (the lessee).

Definition  Leasing is a process by which a firm can obtain the use of a certain fixed asset for which it must make a series of contractual periodic tax deductable payments.

ESSENTIAL ELEMENTS OF LEASING
Parties to the contract  Asset  Ownership  Term of Lease  Lease Rentals  Modes of Terminating Lease

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.

CLASSIFICATION

Financial Lease and Operating Lease Sales and lease back and Direct lease Single investor lease and Leveraged lease Domestic lease and International lease

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.

FINANCIAL LEASE CONTD………

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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.

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.

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.

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
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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.

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. Budgeting: A fixed contract, it is relatively easy to budget and forecast with Flexibility and convenience: The lease agreement can be tailor- made in respect of lease period and lease rentals are according to the convenience and requirements of all lessees Tax advantages Improvement in liquidity Saving of capital

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DISADVANTAGES

No Ownership Costly option - high interest rates, costlier than straight buying Long Term Expense Maintenance 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.

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 :
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Is capitalized in the book of lessor 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