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LEASES A lease is a form of financing under which the owner of an asset (the lessor)

temporarily transfers the right to use, and sometimes other ownership rights andobligations, of an asset to another party (the lessee).

Leasing became a common financing tool after 1973 in India.

Lease financing denotes procurement of assets through lease.

Leasing industry plays an important role in the economic development of a

country by providing money incentives to lessee.

BENEFITS OF LEASING - LESSEE

It provides an alternative to ownership.

The party that leases also benefits from not having its resources invested in

asset. Higher productivity and profits are derived from productive use of asset, rather

than its ownership.

Leasing provides an important financing alternative.

Lessees also benefit from a number of tax advantages.

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Types of leases

This type oflease have

economic

characteristics

of asset

ownership

Allows onlyuse of an

asset, doesnt

convey

ownership

The owner of an

asset sells the assetto a party who in turn

leases back the

same asset to the

owner in

consideration of

lease rentals.

Purchased ofan asset being

leased is

financed by a

third party

A firmacquires the

right to use

an asset from

the

manufacturer

directly.

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CAPITAL LEASE Vs OPERATING LEASE

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EFFECT ON FINANCIAL STATEMENTS

Lessee must depreciate the leased

asset and report the expense on the

income statement. Also records

periodic interest expense as it's owed

over the lease term and reports it in the

income statement, in case of capital

lease.

Lessee records rent paid on an

operating lease in the income statement

as a reduction of sales.

Income Statement for XYZ Ltd.

Sales 100000

COGS 60000Gross Profit 40000

Salaries 12000

Depreciation on Leased Asset 5000

Interest Expense on Lease 2000

Insurance 1000

Water & Electricity 3000

Tax expense 3000

Net Income 26000

Income Statement for PQR Ltd.

Sales 100000

COGS 60000Gross Profit 40000

Salaries 12000

Stationary 2500

Advertising 1000

Insurance 1000

Water & Electricity 3000

Tax expense 3000

Net Income 29500

Income Statement for ABC Ltd.

Sales 100000

COGS 60000

Gross Profit 40000

Salaries 12000

Interest Expense on Lease 3500

Advertising 1000

Insurance 1000

Water & Electricity 3000

Tax expense 3000

Net Income 28500

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Advantages of leasing SAVING OF CAPITAL

Leasing covers the full cost of the equipment used in the business by providing100% finance. The lessee is not to provide or pay any margin money as there is no

down payment. In this way the saving in capital or financial resources can be used for

other productive purposes

e.g. purchase of inventories.

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.

PLANNING CASH FLOWS

Leasing enables the lessee to plan its cash flows properly. The rentals can be paid

out of the cash coming into the business from the use of the same assets.

IMPROVEMENT IN LIQUIDITY

Leasing enables the lessee to improve their liquidity position by adopting the sale

and lease back technique.