Leasing

Leasing: The process by which a firm can obtain the

use of certain fixed assets for which it must make a
series of contractual , periodic, tax deductible
payments.
LESSEE: The lessee is the receiver of the
service of the assets under lease contract.
Lessor: Ones one who grants a lease.
Owner of the assets

# Lease
Operating Leases
Contractual agreement
Maturity - less than 5 years
Periodic payment
Cancelable by the option of lessee
Penalty --- if cancel before maturity
Short lives assets held to maturity
Life of the assets may more than the lease period
Return the asset to the Lessor after lease period
After lease period owner May sale the asset or may lease
O.L. require the Lessor to maintain

FINANCIAL LEASE / CAPITAL LEASE

Long term Lease
Non cancelable
Obligate to pay- lessee
Predefined time
Similar to Long Term Debt
Payment fixed tax deductible

 Financial Accounting Standards Board (FASB)

Standard No. 13, Accounting for lease, a financial or
capital lease is defined as one having any of the
following elements:
The lease transfers ownership of the property to the
lessee by the end of the lease term.
The lease contains an option to purchase the property
at a bargain price.
The lease term is equal to 75% or more of the
estimated economic life of the property.
At the beginning of the lease, the present value of the
lease payments is equal to 90% or more of the fair
market value of the leased property.

 # Leasing Techniques
1. Direct Lease :
A Lease under which a Lessor owns or acquires the
assets that are leased to a given lessee.
2.Sale and Leaseback :
A Lease under which the lessee sells an assets for
cash to a prospective Lessor and then leases back the
same asset, making fixed periodic payments for its
use.
lessee receive cash
minimize liquidity problem
obligation fixed periodic payment

3.Leveraged Lease

A lease under which the Lessor acts as an equity

participant, supplying only about 20% of the cost of
asset, with a lender supplies the balance.

# Lease agreement

maintenance clause

renewal options

purchase options

 # Advantages of Lease
Leasing allows the lessee, in effect to depreciate land,
which is prohibited if the land were purchased.
Assets & Liabilities in the Balance Sheet, leasing may
result in misleading financial ratio.
Sale & Leaseback arrangement may permit the firm to
increase its liquidity by converting an existing asset
into cash, which can then be used as working capital.
Leasing provides 100% financing.
When a firm becomes bankrupt or is Reorganized, the
maximum claim of lessors against the corporation is 3
years of lease payments, and the lessor of course gets
the asset back.
In a lease arrangement, the firm may avoid the cost of
obsolescence.
A lessee avoids many of the restrictive covenants that
are normally included as part of a long term loan.

 # Disadvantages of Leasing
A lease does not have a stated interest
cost
Lessee is generally prohibited from
making improvements
If a lessee leases an asset that
subsequently become obsolete, it still
must make lease payments