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Assignment of Lease Finance and Operating Finance

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13 views

Assignment of Lease Finance and Operating Finance

Uploaded by

marufhammed496
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Assignment on

The benefits of Operating lease and finance lease from the


perspective of Lessor and Lessee

Submitted to
Dr. Mohammad Hasmat Ali
Professor
Department of Finance
University of Chittagong

SUBMITTED BY
Tanvir Mia
ID: 19306025
Department of Banking & Insurance
University of Chittagong

DATE OF SUBMISSION 05.10.2024


Operating Lease
An operating lease is a contract that allows the lessee to use an asset owned by the
lessor for a specific period in exchange for regular payments, without transferring
ownership of the asset. The lease typically has a shorter duration than the asset's
useful life, and at the end of the lease term, the asset is returned to the lessor.
Operating leases are commonly used for equipment, vehicles, and real estate.
Lessor's Perspective:
1. Asset Control and Management: The lessor retains ownership of the asset,
allowing for control over its management and the ability to dictate
maintenance standards. This can enhance the longevity and value of the asset.
2. Frequent Asset Turnover: Operating leases typically have shorter durations
compared to finance leases. This allows lessors to frequently update their asset
inventory, keeping pace with market demand and technological
advancements.
3. Stable Cash Flow: Operating leases generate a consistent stream of revenue
through regular lease payments, which can contribute to stable financial
performance for the lessor.
4. Depreciation Benefits: As owners of the assets, lessors can take advantage
of depreciation deductions for tax purposes, reducing taxable income.
5. Marketability of Assets: Because operating leases are often for short periods,
lessors can market the asset again at the end of the lease term, potentially at a
higher rate if the asset remains in demand.
Lessee's Perspective:
1. Lower Upfront Costs: Operating leases usually require minimal initial
payment, allowing lessees to preserve capital for other uses or investments.
2. Off-Balance-Sheet Financing: Operating leases are not typically recorded as
liabilities on the balance sheet, which can enhance key financial ratios,
making the lessee appear more financially stable.
3. Flexibility in Asset Use: Lessees can lease an asset for a specific period
without a long-term commitment, providing the flexibility to adapt to
changing business needs or technology.
4. Included Maintenance: Often, operating leases include maintenance and
support services, reducing the operational burden on the lessee and ensuring
the asset is kept in good condition.
5. Access to Updated Technology: With the ability to frequently change assets,
lessees can stay current with the latest technology or equipment, which can
enhance operational efficiency.

Finance Lease
A financing lease (also known as a capital lease) is a type of lease agreement where
the lessee effectively assumes most of the risks and rewards of owning the asset. In
essence, it is a way for a company to finance the acquisition of an asset without
buying it outright. Over the lease term, the lessee treats the leased asset as if it were
purchased, and the asset and the lease liability are recorded on the balance sheet.
Lessor's Perspective:
1. Long-Term Revenue Generation: Finance leases typically have longer
terms, ensuring a stable and predictable income stream over a longer period.
2. Potential for Residual Value: The lessor may retain the residual value of the
asset at the end of the lease, allowing for potential additional revenue if the
asset can be leased again or sold.
3. Higher Returns: Since finance leases involve higher payments compared to
operating leases, they can provide greater profitability for the lessor.
4. Tax Advantages: Similar to operating leases, lessors can benefit from tax
deductions related to depreciation and interest, which can enhance overall
returns.
5. Control Over Asset Depreciation: Lessors can manage how and when the
asset is depreciated for tax purposes, potentially maximizing tax benefits.

Lessee's Perspective:
1. Ownership Benefits: Lessees often have the option to purchase the asset at
the end of the lease term for a predetermined price, allowing them to acquire
an asset without significant upfront costs.
2. Improved Cash Flow Management: Finance leases enable lessees to spread
the cost of the asset over its useful life, making it easier to manage cash flow
while using the asset.
3. Predictable Payment Structure: Payments are typically fixed, aiding in
budgeting and financial forecasting for the lessee.
4. Building Equity: Since finance leases may allow for ownership at the end,
lessees can build equity in the asset, which can be beneficial for long-term
financial planning.
5. Ability to Use High-Value Assets: Lessees can access and use high-value
assets without the significant capital expenditure required for outright
purchase, enhancing operational capabilities.

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