Definition:Definition: Leasing is a contractual arrangement , where The owner (Lessor) of the Asset(Equipment) Transfers the possession / right to use the Asset(Equipment) to another(Lessee) For an agreed period of time in return for rental.
Essential Elements of LeasingParties to a Lease Contract: Essentially two parties Lessor – is the owner of the asset that is being Leased. Lessee – is the receiver of the services of the asset under a Lease contract. Lessor and Lessee can be Individual or legally recognised party. The lessor is either the asset’s manufacturer or an independent leasing company Lease broker – big ticket Leases use him. Major Players in Lease Market: Banks- Indian & Foreign /FIs subsidiaries of Banks/FIs, NBFCs
Essential Elements of Leasing Asset – Subject matter of Leasing contract; Automobiles, Plant & Machinery, Equipments, Land & building, Factory, a running business, aircraft, Ships, etc. Ownership – remains with the Lessor Use - of the asset is allowed to the Lessee. Lease Term – Primary /secondary Lease Term. Lease Rentals – is the consideration for the lease transaction. So structured to recover the investment cost, during agreed period.
TYPES OF LEASING Finance Lease and Operating Lease Sale & Lease back and Direct Lease Single Investor Lease and Leveraged Lease Domestic Lease and International Lease
Finance Lease Long-term, non-cancellable lease contracts are known as financial leases. To record a lease as a capital lease, the lease must be noncancelable. One or more of four criteria must be met: 1. Transfers ownership to the lessee. 2. Contains a bargain-purchase option. 3. Lease term is equal to or greater than 75 percent of the estimated economic life of the leased property. 4. The present value of the minimum lease payments (excluding executor costs) equals or exceeds 90 percent of the fair value of the leased property.
Features of Financial ServiceA Financial Lease is structured to include: The Lessee selects the equipment meeting his requirement The Lessee negotiates the price, delivery schedule, installation, warranties, maintenance, etc. The Lessee informs the above details and Lessor makes the payment directly to the Seller(manufacturer /distributor). The equipment is directly delivered to the Lessee by seller. The Lessee enjoys exclusive and peaceful possession and use of the equipment. Enters in to the Lease agreement with Lessor. The Lessor pays the amount directly to Seller(Manufacturer/supplier).
Operating Lease Characteristics of an Operating Lease: The Lease term is significantly less than the economic life of the equipment. The Lessee enjoys the right to terminate the Lease at short notice without any significant penalty. The Lessor usually provides the operating know-how, suppliers related service, and undertakes the responsibility of insuring and maintaining (repair and technical service) the equipment
Differentiation Between Operatinglease and Financial leaseBASIS Financial Lease Operating leasMeaning Long-term, non-cancellable lease A Lease which is a short term one contracts are known as financial and one which does not cover the leases. useful life on an asset is called an operating lease.Form In this type of lease, money is The lessor is carrying on business provide by lessor and the asset is of leasing and he holds such purchase form outside assets or is a manufacturer of such asset leases its assetMaintenance The lessee undertakes the In this type of lease, repairs and maintenance of the asset, paying maintenance is done by the lessor. insurance premium ect.Risk of In this types of lease, the lessee In this types of lease, the lessorObsolescence bears the risk obsolescence, so far bears the risk obsolescence as he uses the asset. during the period of the lease.
BASIS Financial Lease Operating leasPeriod of Period of lease – whole useful Period of lease – for shot time.Lease life of asset.Option to Buy Option to buy for lessee. Period of lease – for shot time.Accounting According to the international No entry is made in the balanceEntries accounting standard-17, an sheet of the lassee under this type entery iis made in the balance of lease, because lease is in the sheet of the lessee on both the form of a hired asset side
Sale and Lease backSale and Lease back: The owner(Lessee) of the equipment sells it to a Leasing company (Lessor). The Lessor, leases the equipment back to the Lessee. Under this arrangement, the assets are not physically exchanged but it all happens in records only. 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.Two sets of cash flows occur: The lessee receives cash today from the sale. The lessee agrees to make periodic lease payments, thereby retaining the use of the asset.
Direct Lease 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. Bipartite Lease – Equipment supplier-cum-Lessor and Lessee. Tripartite Lease (Sales-aid-Lease) – Equipment supplier, Lessor and Lessee.
Single Investor Lease • Only two parties – Lessor and Lessee. • Leasing company (Lessor) funds the entire investment, having appropriate mix of Equity-cum-Debt. • Finance raised by the Lessor, is without recourse to the Lessee.
Leveraged LeaseLeveraged Lease: 3 parties to the transaction. Lessor ( Equity investor) Lender Lessee. The Leasing company (Equity investor) buys the equipment, through substantial borrowing, and with full recourse to the Lessee and without recourse to it. The Lender obtains an assignment of the Lease and a first mortgage of the equipment.
Domestic Lease andInternational Lease When a lease agreement is made between citizen of same countries, it is called Domestic lease When a lease agreement is made between citizen of different countries, it is called International lease
Advantages of Leasing Provides full Finance Flexible Saves from Recurring cost of finance Absence of restrictions Tax Benefits Increases the capacity to borrow Useful in case of fast changing technology Faster and Cheaper credit
Limitations of Leasing No Benefit of Residual Value High cost of leaseing No benefit of ownership Not Flexible Disputes
Factors affecting LeasingDecisions Availability of cash Effect on Borrowing Capacity Shifting the Risk of Obsolescence Convenient Arrangement Less Restrictions on Firm Salvage Value Tax Benefits Leas Expenses
Institutions In the field ofLeaseing All India Financial Institutions Leasing Companies Banks Financial Companies Industrial Groups having Leasing Companies
Difficulties Faced by LeasingCompanies in India Competition Lack of Trained Employees Proportion of Debt-Equity not maintained Lack of Provision for Depreciation Low Investment of Promoters Shortage of Funds Inefficiency of Management Government Attitude
LEASING IN INDIA Leasing has grown by leaps and bounds in the eighties but it is estimated that hardly 1% of the industrial investment in India is covered by the lease finance, as against 40% in USA and 30% in UK and 10% in Japan.
DIFFERENCE BETWEEN LEASE FINANCINGAND HIRE PURCHASEBASIS LEASE FINANCING HIRE PURCHASEMeaning A lease transaction is a Hire purchase is a type of commercial arrangement, instalment credit under which whereby an equipment the hire purchaser agrees to owner or manufacturer conveys take the goods on hire at a to the equipment user the right stated rental, which is inclusive to use the of the repayment of principal as equipment in return for a rental. well as interest, with an option to purchase.Option to No option is provided to the Option is provided to the hireruser lessee (user) to purchase the (user). goods.Nature of Lease rentals paid by the Only interest element includedexpenditur lessee are entirely revenue in the HP instalments is revenuee expenditure of the lessee. expenditure by nature.Componen Lease rentals comprise of 2 HP instalments comprise of 3ts elements (1) finance charge elements (1) normal trading and (2) capital profit (2) finance