LEASING
GROUP 9
DEFINITION
Lease
is a contract between a lessor, the owner of the
asset, and a lessee, the user of the asset.
Lease
Rental The lessor gives the right to the lessee
to use the asset over an agreed period of time for a consideration.
Lessee
pays the rental to the lessor as regular fixed
payments over a period of time.
Up-fronted lease - More rentals are charged in the
initial years and less in the later years of the contract.
Back-ended lease - Leasor is entitled to claim depreciation on the leased asset at the end of the lease contract.
Lease contract is divided into two parts -Primary lease Provides for the recovery of the cost of the asset and profit through lease rental. -Secondary lease Follows nominal lease rental.
TYPES OF LEASES
Operating Lease Short-term, cancellable lease agreements.
Operating lease may run for 3 to 5 years.
The lessor is generally responsible for maintenance and insurance. The shorter the lease period, the higher will be the lease rentals.
Eg: A tourist renting a car, lease contracts for computers,
office equipments, trucks and hotel rooms.
Financial Lease
Long-term, non-cancellable lease contracts. Financial leases amortise the cost of the asset over the term of lease, therefore called as capital or full-payment or direct leases. The lessee is normally responsible for maintenance and
insurance.
The lessee also bears the risk of obsolescence.
Eg : Plant, Machinery, Land, Building, Ships and aircraft.
DIFFERENCE
Term
FINANCIAL LEASE
Long term
OPERATING LEASE
Short term
Cancelability
Non-Cancelable
Cancelable
Lease period
Equal to life of the asset
Less than the life of asset
Transfer of all risk and return
Substantially transfers
Does not transfer substantially Payable by lessor
Maintenance, Insurance & Payable by lessee Taxes Asset Selection Selected by lessee
Selected by lessor
Lease Capitalization
In the books of lessee
In the books of lessor
TYPES OF FINANCIAL LEASE
Leveraged lease
Involves lessor, lessee and financier. Lessor (leasing company) provides equity equal to
about 25% of the assets cost.
Financier (a bank or a financial institution) provides
the remaining amount mainly as loan.
Popular method of financing expensive assets.
Sale-and-lease-back
Special financial lease arrangement. A user may sell an(existing)asset owned by him to the
lessor(leasing company) and lease it back from him.
Provide substantial tax benefits.
Eg : SCICI purchased Great Eastern Shipping
Companys bulk carrier, Jag Lata, for Rs 12.5 crore
and then leased it back to them on a 5yr lease for
Rs.28.13 lakh pm. The ships written down book value was Rs.2.5 crore.
Cross-border lease
Lessor and lessee are situated in two different
countries.
Involves relationships and tax implications more
complex than the domestic lease. Foreign-to-foreign lease
The lease transaction takes place between three parties
manufacturer, lessor and lessee in 3 different
countries.
Other terms used by the leasing industry Closed and open ended lease Direct lease Master lease Percentage lease Wet and dry lease Net net net lease Update lease
ADVANTAGES OF LEASING
Convenience and flexibility Shifting of risk of obsolescence Maintenance and specialised services
Hire Purchase Financing
1.
Lease Financing
1.
2.
3.
Depreciation: Hire is entitled to claim depreciation tax shield. Hire purchase payments: It includes interest and repayment of principle. Hirer gets tax benefits only on the interest. Salvage value: Once the hirer has paid all installments, he becomes the owner of the asset and can claim salvage value.
2.
3.
Lessee is not entitled to claim depreciation tax shield. Lease payments: Lessee can charge the entire lease payments for tax purposes. Thus, he saves tax on the lease payment. Lessee does not become owner of the asset. Therefore, he has no claim over the assets salvage value.
CONTENTS OF A LEASE AGREEMENT
1.Description of the lessor, the lessee and the equipment. 2.Amount, time and place of lease rental payments. 3.Time and place of equipment delivery. 4.Lessees responsibility for taking delivery and possession of the leased equipment. 5.Lessees responsibility for maintenance, repairs, registration etc.
6.Lessee enjoys the benefits of the warranties.
7.Insurance to be taken by the lessee
8.Variations in lease rentals if there is a change in external factors. 9.Option of lease renewal for the lessee 10.Return of equipment on expiry of the lease period 11.Arbitration procedure in the event of dispute.
LEASING COMPANIES IN INDIA
Sundaram Finance Cholamandalam Finance Mahindra & Mahindra GE Capital Shriram Finance TATA Finance Citicorp
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