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Leasing
A lease is a legal agreement that provides for the use of something -- typically real estate or equipment -- in exchange for payment. Once a lease is signed, its terms, such as the rent, cannot be changed unless both parties agree. A Click to edit Master subtitle stylewhich means you lease is usually legally binding, are held to its terms until it expires. If you break a lease, you could be held liable in court.

A lease is a contractual arrangement where the lessor grants the

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According to the INSTITUTE OF CHARTED ACCOUNTANTS OF INDIA (ICA)

A lease is an agreement whereby the lessor conveys to the lessee , in return for rent , the right to use an asset for an agreed period of time . is a person who conveys to another person (lessee) the right to use an asset in consideration of a

Lessor

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Characteristics of leasing
a)

The parties :- 2 parties lessor and lessee The asset :- leasing is used for financing the use of fixed assets of high value . Eg an automobile , an aircraft , plant & machinery . The term :- it is called the lease period . The period for which the lease agreement is in operation The lease rentals :- it is the

b)

c)

d)

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Modes ofterminating lease:

A. The lease is renewed on a perpetual basis or for a definite period. B. The assetreverts to thelessor. C. Theassetsreverts tothe lessorandthe lessor sellsit to a third party. D. The lessor sellsthe asset to the lessee.

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CLASSIFICATION OF LEASING
1. Financial Lease and operating lease 2. Sales and leaseback and direct lease -Bipartite lease - Tripartite lease 3. Single investor lease and leveraged lease 4. Domestic lease lease and international

- import lease

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Cont.
5. close and open end leasing 6. swap and wrap leasing 7. double dip and triple dip lease

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Finance Leases
Under

a finance lease, the finance company owns the asset throughout and the agreement covers a set period considered to be the full economic life of the asset. Often, there is an option to continue leasing at a reduced rate, at the end of the contracted period. you are not the owner of the asset, you cannot sell the asset

As

Operating Leases
An

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operating lease runs for less than the full economic life of the asset, and the lessee is not liable for the financing of its full value. lessor carries the risk associated with the residual value of the asset at the end of the lease. type of lease is often used when

The

This

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BENEFITS OF LEASING
Leases

have benefits to the lessee as

well.
For

example, when a business leases equipment, it doesn't have to take the full amount of capital out of the bank for purchase. All except the monthly fee can stay in the bank account or be used for other purposes such as inventory.

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Cont
it

is usefulif you don't need the equipment for its entire working life leasing company will take the asset back at the end of the lease companyis responsible for maintenanceandinsurance don't have to show the asset on your balance sheet hire

the

theleasing you

Contract

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ADVANTAGES

LARGE FUNDS ARE NOT REQUIRED :full cost of asset is not paid by the leasee . HIGHER STANDERDS OF EQUIPMENTS :no need of buying expensive equipments . FIXED PERIOD OF TIME :amount is paid on fixed period basis for the asset . It helps in fixing the future budgets . BENEFITS IN taxation :lease amount is deductable in taxtation process .

Cont.
No the

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charges for maintenance .

leasing company carries therisksif the equipment breaks down leasing company can usually get better deals on price than a small business could and will have superior product knowledge 'long funding leases' - finance leases over seven years and sometimes over five years; and

the

on

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DISADVANTAGES
NO

RIGHT TO CLAIM CAPITAL ALLOWANCES - customers do not have right to claim capital allowances on the leased assets if the lease period is for less than 5 years . should made in advance .

Payments

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Contents of a lease agreement:

The

lease agreement specifies the legal rights and obligations of the lessor and the lessee. It typically contains terms relating to the following: of the lessor, the lessee, and the equipment. time and place of lease rentals payments.

Description Amount,

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Implication of tax on leasing:

It It It

has implication for income tax purposes. is a device offering potential tax benefits to both lesser and lessee. provides for a significant scope for tax exemptions or reduction of tax liability.

Implication for lessor- depreciationn tax shield:

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Purpose: Under the companies act, depreciation is provided for the purpose of computation of managerial remuneration, dividend payment and disclosure in financial statement. Depreciation rate: Depreciation in book of accounts in accordance with section xiv of companies act. For this purpose, separate rates of depreciation are charged on different depreciable assets, both on WDV and straight line method.

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Cont
Lessors

ownership: lessor is eligible to claim the benefits of depreciation taxshield. allowances: lessor is not eligible for any other allowance apart from the depreciation allowance. and lease back : with regard to asset acquired under the sale and leaseback arrangement, depreciation allowance can be claimed only on the

Other

Sale

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Implication for lessee

Allow ability of lease rentals: Under the income tax act, rentals are allowed at the normal business expenditures of the lessee for assessment purpose.
1. 2. 3.

In the nature if revenue Not a personal expense Wholly and exclusively related to business purposes of the assesse (lessee).

Deduction of incidental expenses: The various incidental expenses, such as repairs and maintenance, insurance, finance charge and so on, that