SAINTGITS INSTITUTE OF MANAGEMENT,Kottayam

ByMs. Lekshmi VijayanMs. Rini Sara Zacharia

LEASING- DEFINITION

• A written agreement under which a property

owner allows a tenant to use the property for a

specified period of time and rent.

• The lessee (person taking out a lease) agrees to

pay a number of fixed or flexible installments

over an agreed period to the lessor, who remains

the owner of the asset (item) throughout the

period of the lease.

STEPS IN LEASING

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.

TYPES OF LEASING

Lease

Finance lease Operatin

g lease

Sale and

Lease Back

Leveraged leasing

Direct leasin

g

a)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.

• 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.

b) 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.

c) 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.

d) 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

• 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.

e) 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.

• Tax advantages:

• Budgeting:A fixed contract, it is relatively easy to

budget and forecast with

• Saving of capital

• Improvement in liquidity:

• Flexibility and convenience

The lease agreement can be tailor-

made in respect of lease period

and lease rentals according to the

convenience and requirements of all

lessees

DISADVANTAGES

1. No Ownership

2. Costly option - high interest rates, costlier than straight

buying

3. Long Term Expense

4. Maintenance

5. 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.

Clauses in lease agreement

Nature of the lease

Description

Delivery and redelivery

Period

Lease rentals

Use

Title

Repairs and maintenance

Alteration

DOCUMENTATION

• Requirements

• Proof for indebtedness

• Evidence availability and enforceability of security

• Focus on the terms of lease

• In case of default :company can take appropriate action

Legal aspects of Leasing

• The lessor has the duty toDeliver the asset to the lessee Authorize the lessee to use the assetLeave 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 :• Is capitalized in the book of lesser

• 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