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November 08, 2013

Leasing - Introduction and Types

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Leasing may be defined as a method of acquiring right to use an equipment or asset for consideration. Leasing has become a popular source of finance for the companies requiring equipments like computers, air crafts, plants, trucks etc.

Steps involved in leasing :
  1. Decission of the leasee regarding the asset required and determine the manufacturing and other requirements such as price warranties, terms of delivery etc.
  2. Entering into a lease agreement with the lessor containing the rights and obligations of both the lessor and lessee.
  3. Signing the lease agreement.
  4. Finally lessor intimates the manufacturer / supplier to supply the asset to lessee. The lessor makes the payment to supplier after the asset has been delivered to lessee.
Types of Lease Agreements :
  • Financial Lease : According to Accounting Standard 19, Lease issued by the institute of Chartered Accountants of India, a finance lease is one which satisfies any one or more of the following condiitons :
    1. The lessor transfers ownership of the asset to the lessee by the end of the lease term.
    2. The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease it is reasonably certain that the option will be exercised.
    3. The lease term is for the major part of the economic life of the asset even if title is not transferred.
    4. At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially equal to the fair value of the leased asset.
    5. The leased asset is of a specialized nature such that only the lessee can use it without major modifications being made.
Finance lease is also called as "close-end lease" under which all the risks incidental to ownership of the asset and the benefits arising there from are transferred to lessee except the legal title which may or may not be eventually transferred.
  • Operating Lease : Operating lease is one which does not satisfy any of the conditions of finance lease. It is a lease under which the lessee will have the right to use the leased property for a limited period of time and does not give lessee all the benefits and risks that are associated with the asset. the lessor is responsible for the maintenance of the asset, insurance and all other expenditure. It is preferred where there is a probability of rapid obsolescence of the asset. It is also called as "open end lease agreement"
  • Sale and Lease Back : Under this a firm sells an asset to another person, who in turn leases back the asset to the firm. The firm gets the market price and the right to use the asset. the firm pays the periodic rental payments to the lessor. It is beneficial to both the lessor and the lessee as the lessee gets immediate cash and improves his cash flow position. The lessor gets the benefit in terms of tax credits due to depreciation. It is popular with the companies facing short term liquidity crises.
  • Leveraged Leasing : This form of leasing has become very popular in modern days. un line in other forms of leasing in this type there will be three parties viz, lessee, lessor and the lender. The position of the lessee is same as in case of other forms of lease, lessee agrees to pay the periodic payments over the lease period and gets the right to use the leased asset. The position of lesser however differs. he will acquire the asset only by paying part of the cost say 30%. The balance of 70% is provided by a financier (lender) as a loan to lessor on the security of asset, besides assignment of the leased assets rental payments.

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1 comment:

  1. hi mam it was very helpful .......thanks a lot
    yours sincerely karthik


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