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LEASING

AND HIRE PURCHASE

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LEASING

Lease is a contract under which a lessor,

the owner of the assets, gives right to use

the asset to a lessee, the user of theassets, for an agreed period of time for a

consideration called the lease rentals

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Types of Leases

Operating Lease

Financing Lease

Sale and Lease Back

OTHER LEASE TERMINOLOGY

a) Leveraged lease

b) Cross-border lease

c) Closed and open ended leased) Direct lease

e) Wet and dry lease

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Operating Lease

Short-term, cancelable lease agreementsare called operating lease.

Tourist renting a car, lease contracts forcomputers, office equipments and hotelrooms.

The Lessor is generally responsible for

maintenance and insurance. Risk of obsolescence remains with the

lessor.

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Financial Lease

Long-term, non-cancelable lease contracts

are known as financial lease.

Examples are plant, machinery, land,building, ships and aircrafts.

Amortize the cost of the asset over the

terms of the leaseCapital or Full pay-out

leases.

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DIFFERENCE FINANCIAL LEASE

a) Non-cancelable

b) Lessee provides formaintenance and

taxesc) Risk of obsolescence

is assumed by lessee

d) Medium to long term

e) Similar to loan Costplus interest over aspecified period oftime

f) Lessor fulfillsfinancial function

OPERATING LEASE

a) Cancelable

b) Lessor provides formaintenance & taxes

c) Lessor assumes Risk ofobsolescence

d) Short term

e) It is like a rentalagreement. Restrictedto regular rentalpayment.

f) The lessor fulfillsservice function.

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Sale and Lease Back

Sometimes, a user may sell an (existing)

asset owned by him to the lessor (leasing

company) and lease it back from him.Such sale and lease back arrangements

may provide substantial tax benefits.

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Advantages of Leasing

Convenience and Flexibility.

Shifting of Risk of Obsolescence.

Maintenance and Specialized Services.

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DifferenceHire Purchase Financing Lease Financing

Hirer is entitled to claim

Depreciation Tax Shield.

Lessee is not entitled to

claim depreciation tax

shield.

Hirer can charge only

interest Portion.

Lessee can charge the

entire lease payments as

expense for tax

computation.

Once the hirer has paid allinstallments, he becomes

the owner of the asset and

can claim its salvage

value.

Lessee does not becomethe owner of the asset.

Therefore he has no claim

over the asset salvage

value.

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Hire Purchase

The owner of the asset (the Hirer or themanufacturer) gives the possession of the assetto the Hirer with an understanding that the Hirer

will pay agreed installments over a specifiedperiod of time.

The ownership of the asset will transfer to thehirer on the payment of all installments.

The Hirer will have the option of terminating theagreement any time before the transfer ofownership of assets.

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Hire Purchase

Mode of financing

Installments

Down payment