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Leases - A Critique On Finance and Accounting

The document discusses different types of leases including operating leases, financial leases, leveraged leases, and cross-border leases. An operating lease is a short-term lease where ownership of the asset remains with the lessor. A financial lease is a long-term lease where ownership transfers to the lessee at the end. Leveraged leases and cross-border leases involve multiple parties across borders.

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Salman Zafar
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206 views

Leases - A Critique On Finance and Accounting

The document discusses different types of leases including operating leases, financial leases, leveraged leases, and cross-border leases. An operating lease is a short-term lease where ownership of the asset remains with the lessor. A financial lease is a long-term lease where ownership transfers to the lessee at the end. Leveraged leases and cross-border leases involve multiple parties across borders.

Uploaded by

Salman Zafar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Leases – A Critique on Finance and Accounting

• A contract of lease may be defined as a


contract whereby the owner of an asset
(lessor) grants to another party (lessee) the
exclusive right to use the asset usually for on
agreed period of time in return for the
payment of rent.
Features
• A lease is a contract between the lessor (owner of asset) and
user of asset (lessee)
• The asset may be any type either tangible or intangible
• The ownership title is retained by the lessor
• The lessee uses the asset only
• The consideration from the side of lessor is grating of lease
rights to the lessee.
• The consideration from the side of lessee is payment of
rentals over the terms of lease.
• There is always a written contract between lessor and lessee.
Lease arrangements

Direct leasing Cross border leasing


Direct Leasing
• Under direct leasing the firm acquires the
right to use the property that it did not
previously own.

• Direct leasing may be arranged through either


the manufacturer or a financial institution
Operating Lease

• It is a short-term lease, the lease period being


significantly less than the useful life of the
equipment.
• The lease is not fully amortized.
• Put differently, the lease rentals payable during the
lease period are not sufficient to cover fully the cost
of the equipment along with an acceptable return
thereon.
• Since the period of the operating lease is significantly
less than the useful life of the equipment, the lessor
can through further leases or disposal recover the
investment along with an acceptable rate of return.
• The lease is usually cancelable at short notice. It is
cancelable at the option of either the owner or user
after giving stipulated notice.
• The lessor is responsible for maintenance, insurance
and taxes.
Operating lease may be categorized into:

• Service lease
• Captive lease
Service lease
• Resembles a contract hire.
• The lessor renders services of assets such as
office equipment, automobiles fro a relatively
short time period.
• The principal aim of the lessor to have a
regular flow of income an interest on capital
Captive lease
GMAC
Financial Lease:
• It is an intermediate term to long-term non-cancelable
arrangement. During the initial lease period, referred to as
the “primary lease period”, which is usually 3 years or 5
years or 8years, the lease cannot be cancelled.
• The lessee is responsible for maintenance, insurance and
taxes.
• The lease is fully amortized during the primary lease
period. This means that during this period the lessor
recovers, through the lease rentals, his investment in the
equipment along with an acceptable rate of return.
• The lessee usually enjoys the option of renewing the lease
for further periods for every nominal lease rentals.
Distinction between finance and operating
lease
Finance lease Operating lease
Ownership transferred by Yes No
the end of the lease term
Lease contains bargains Yes No
purchase options
Lease term form major Yes No
part of asset useful life
PV of minimum lease Yes No
payment greater than asset
fair value
Leveraged Leasing
• The lessor owns the property but acquires it
partly by contributing his funds and partly by
taking loans from the FI.
• Provides loan against mortgage on property as
well as by lease payments,
• Is used for financing those assets which need
huge capital outlays
• 3 participants involved.
Cross-Border Lease

• When a lessor and lessee are not falling within


one nation, then the lease is written between
them, this is called a cross-border lease.
• It is an international commercial transaction.
 
Capital Lease

• A capital lease is a long-term arrangement


which is irrecoverable during its primary lease
period.
• The lease contains an option to purchase the
asset at a bargain price. 
Procedural Aspects
• The lessee has to take the decision about the asset required and
determine the manufacturer or the supplier. He also decides
about his other requirements, viz, the design, specifications, the
price, warranties, term of delivery, installation and servicing.
• The lessee approaches the lessor and submits a formal
application and negotiates terms and conditions of lease.
• The lessee and lessor signs lease agreement.
• The lessee assigns purchase rights to the lessor and lessor
purchase the asset which is delivered to the lessee.
• The lessor makes payment to the manufacturer or the supplier
after the asset has been delivered, tested and accepted by the
lessee.
• The lessee insures the equipment and endorses the insurance
policy in favor of the lessor.

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