LEASING

SAINTGITS INSTITUTE OF MANAGEMENT,Kottayam

ByMs. Lekshmi VijayanMs. Rini Sara Zacharia

LEASINGLEASING- DEFINITIONA 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

FEATURESLeasing a product is similar to renting itA 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 LEASINGLease Finance leaseOperating leaseSale and Lease BackLeveraged leasingDirect leasinga)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 LEASEContrast to the financial leaseA 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 leaseThe 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 LEASINGA 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 LEASINGUnder 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 LEASINGNo 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 convenienceThe lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees DISADVANTAGESNo OwnershipCostly option - high interest rates, costlier than straight buyingLong Term ExpenseMaintenanceNo working capitalLEASE AGREEMENTA 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 agreementNature of the leaseDescriptionDelivery and redeliveryPeriodLease rentalsUseTitleRepairs and maintenanceAlteration

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 actionLegal 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 rentalsProtect the lessors titleTake reasonable care of the assetReturn the leased asset

Accounting aspect of LeasingOperating 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 leaseMust be capitalized in the books of lessee

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