Leasing Ppt

LEASING SAINTGITS INSTITUTE OF MANAGEMENT, Kottayam By Ms. Lekshmi Vijayan Ms. Rini Sara Zacharia

LEASING- DEFINITION • A 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.

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STEPS IN LEASING

FEATURES • Leasing a product is similar to renting it • A 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.

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TYPES OF LEASING Lease

Finance lease

Leveraged leasingDirect leasing Operating leaseSale and Lease Back

a)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 Ø the cost of maintenance, Ø insurance and repairs. •

• Only title deeds remain with the lessor. •

b)

OPERATING LEASE

• Contrast to the financial lease • A lease agreement gives to the lessee only a limited right to use the asset. • The lessoris 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 lease • The 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 LEASING • A 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 LEASING • Under 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 LEASING • No large outlay: ü The cost is spread over a number of years; there is no need to pay the entire amount upfront. • Security: ü The product is still owned by the leasing

company, meaning that

they have better security on finance.

• • Tax advantages: •

• Budgeting: ü A fixed contract, it is relatively easy to budget and forecast with ü • Saving of capital • • Improvement in liquidity: • ü •

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• Flexibility and convenience ü The lease agreement can be tailormade in

respect of lease

period and lease rentals according to the convenience and requirements of all lessees •

DISADVANTAGES 1. No Ownership 2. Costly option - high interest rates, costlier than straight buying 3. Long Term Expense 4. Maintenance 5. No working capital

LEASE AGREEMENT • A 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 agreement ü Nature of the lease ü Description ü Delivery and redelivery ü Period ü Lease rentals ü Use ü Title ü Repairs and maintenance ü Alteration •

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DOCUMENTATION

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• Requirements •

• Proof for indebtedness •

• Evidence availability and enforceability of security •

• Focus on the terms of lease •

• In case of default :company can take appropriate action

Legal aspects of Leasing • The lessor has the duty to vDeliver the asset to the lessee vAuthorize the lessee to use the asset vLeave the asset in peaceful possession v § The lessee has the obligation to § Pay the lease rentals § Protect the lessors title § Take reasonable care of the asset § Return the leased asset v

Accounting aspect of Leasing • Operating 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 •

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Financial lease

• Must be capitalized in the books of lessee •

a)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)

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C)Leased asset is depreciated in the books of lessee

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