LEASING

SAINTGITS INSTITUTE OF
MANAGEMENT,
Kottayam

By
Ms. Lekshmi Vijayan
Ms. 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 Leveraged leasingDirect leasing

Operating leaseSale and Lease Back
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
Ø the cost of maintenance,
Ø 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 lessoris 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:
ü The cost is spread over a number of
years; there is no need to pay the
entire amount upfront.
• Security:
ü The product is still owned by the
leasing company, meaning that
they have better security on finance.
•
• Tax advantages:
•

• Budgeting:
ü A fixed contract, it is relatively easy to
budget and forecast with
ü
• Saving of capital
•
• Improvement in liquidity:
•
ü
•

•
 •

• Flexibility and convenience

ü 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
ü Nature of the lease
ü Description
ü Delivery and redelivery
ü Period
ü Lease rentals
ü Use
ü Title
ü Repairs and maintenance
ü 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 to
vDeliver the asset to the lessee
vAuthorize the lessee to use the asset
vLeave the asset in peaceful
possession
v
§ The lessee has the obligation to
§ Pay the lease rentals
§ Protect the lessors title
§ Take reasonable care of the asset
§ Return the leased asset
v
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
•
Thank you