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Leasing

leasing description - history - definition - types of leasing - advantages - disadvantages

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Leasing

  1. 1. LEASING A presentation by SUSITRA A Department of Management Studies Anna University
  2. 2. HISTORY Prior to 1950, leasing was not popular as it concentrated only on real estates.But now it concentrate almost all types of fixed assests.In India the equipment leasing services was introduced by leasing company of India Ltd in 1993.
  3. 3. MEANING Lease financing is one of the important sources of medium- and long-term financing where the owner of an asset gives another person, the right to use that asset against periodical payments. The owner of the asset is known as lessor and the user is called lessee. The periodical payment made by the lessee to the lessor is known as lease rental.  Under lease financing, lessee is given the right to use the asset but the ownership lies with the lessor and at the end of the lease contract, the asset is returned to the lessor or an option is given to the lessee either to purchase the asset or to renew the lease agreement.
  4. 4. DEFINITON “Lease is a contract, whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right to use the asset usually for an agreed period of time in return for payment of rent” – James C Vanhore “Leasing separates ownership and use as to economic activities and facilitates asset use without ownership ” – Miller, M.H. and C.W. Uptron
  5. 5. STEPS IN LEASING DECISION ON ASSET The lessee makes a decision on the type of asset required for the business activities. For instance, if machinery is required, he has to decide about the design specifications and other features of the machine. DECISION ON LESSOR The lessor has to make a list of prospective lessor. He may conduct cost benefit analysis of selecting of particular lessor. He will select that lessor who is most cost effective in terms of delivery of machinery, rentals, etc.
  6. 6. AGREEMENT The lessee enters into a lease agreement with a lessor. The agreement terms and conditions such as: The lease period The timing and amount of lease rentals Penalty for default Repairs and servicing stipulations as to who is responsible, either lessee or lessor Renewal of lease agreement DELIVERY OF ASSET Once the lease agreement is signed, the lessor contacts the asset provider/manufacturer, (if he does not readily possess one). The lessor makes payment to the asset provider. He then delivers the asset to the lessee.
  7. 7. TYPES OF LEASING 1. Financial Lease Financial leasing is a contract involving payment over a longer period. It is a long-termlease and the lessee will be paying much more than the cost of the property or equipment to the lessor in the form of lease charges. It is irrevocable. In this type of leasing the lessee has to bear all costs and the lessor does not render any service. 2. Operating Lease In an operating lease, the lessee uses the asset for a specific period. The lessor bears the risk of obsolescence and incidental risks. There is an option to either party to terminate the lease after giving notice. In this type of leasing • lessor bears all expenses • lessor will not be able to realize the full cost of the asset • specialized services are provided by the lessor. • This kind of lease is preferred where the equipment is likely to suffer obsolescence.
  8. 8. 3. Leveraged and non-leveraged leases In leveraged and non-leveraged leases, the value of the asset leased may be of a huge amount which may not be possible for the lessor to finance. So, the lessor involves one more financier who will have charge over the leased asset. 4. Conveyance type lease In Conveyance type lease, the lease will be for a long-period with a clear intention of conveying the ownership of title on the lessee.
  9. 9. 5. Sale and leaseback In a sale and leaseback, a company owning the asset sells it to the lessor. The lessor pays immediately for the asset but leases the asset to the seller. Thus, the seller of the asset becomes the lessee. The asset remains with the seller who is a lessee but the ownership is with the lessor who is the buyer. This arrangement is done so that the selling company obtains finance for running the business along with with the asset. 6. Full and non pay-out lease A full pay-out lease is one in which the lessor recovers the full value of the leased asset by way of leasing. In case of a non pay-out lease, the lessor leases out the same asset over and over again.
  10. 10. 7. Specialized service lease The lessor or the owner of the asset is a specialist of the asset which he is leasing out. He not only leases out but also gives specialized personal service to the lessee. Examples are electronic goods, automobiles, air-conditioners, etc. 8. Net and non-net lease In non-net lease, the lessor is in charge of maintenance insurance and other incidental expenses. In a net lease, the lessor is not concerned with the above maintenance expenditure. The lessor confines only to financial service. 9. Sales aid lease In case, the lessor enters into any tie up arrangement with manufacturer for the marketing, it is called sales aid lease.
  11. 11. 10. Cross border lease Lease across national frontiers are called cross border lease, Shipping, air service, etc., will come under this category. 11. Tax oriented lease Where the lease is not a loan on security but qualifies as a lease, it will be considered a tax oriented lease. 12. Import Lease In an Import lease, the company providing equipment for lease may be located in a foreign country but the lessor and the lessee may belong to the same country. The equipment is more or less imported. 13. International lease Here, the parties to the lease transactions may belong to different countries which is almost similar to cross border lease.
  12. 12. ADVANTAGES To Lessor: The advantages of lease financing from the point of view of lessor are summarized below Assured Regular Income: Lessor gets lease rental by leasing an asset during the period of lease which is an assured and regular income Preservation of Ownership: In case of finance lease, the lessor transfers all the risk and rewards incidental to ownership to the lessee without the transfer of ownership of asset hence the ownership lies with the lessor.
  13. 13. Benefit of Tax: As ownership lies with the lessor, tax benefit is enjoyed by the lessor by way of depreciation in respect of leased asset. High Profitability: The business of leasing is highly profitable since the rate of return based on lease rental, is much higher than the interest payable on financing the asset. High Potentiality of Growth: The demand for leasing is steadily increasing because it is one of the cost efficient forms of financing. Economic growth can be maintained even during the period of depression. Thus, the growth potentiality of leasing is much higher as compared to other forms of business. Recovery of Investment: In case of finance lease, the lessor can recover the total investment through lease rentals. To Lessee: The advantages of lease financing from the point of view of lessee are discussed below: Use of Capital Goods: A business will not have to spend a lot of money for acquiring an asset but it can use an asset by paying small monthly or yearly rentals.
  14. 14. Tax Benefits: A company is able to enjoy the tax advantage on lease payments as lease payments can be deducted as a business expense. Cheaper: Leasing is a source of financing which is cheaper than almost all other sources of financing. Technical Assistance: Lessee gets some sort of technical support from the lessor in respect of leased asset. Inflation Friendly: Leasing is inflation friendly, the lessee has to pay fixed amount of rentals each year even if the cost of the asset goes up. Ownership: After the expiry of primary period, lessor offers the lessee to purchase the assets— by paying a very small sum of money.
  15. 15. DISADVANTAGES To Lessor: Lessor suffers from certain limitations which are discussed below: Unprofitable in Case of Inflation: Lessor gets fixed amount of lease rental every year and they cannot increase this even if the cost of asset goes up. Double Taxation: Sales tax may be charged twice: First at the time of purchase of asset and second at the time of leasing the asset. Greater Chance of Damage of Asset: As ownership is not transferred, the lessee uses the asset carelessly and there is a great chance that asset cannot be useable after the expiry of primary period of lease.
  16. 16. To Lessee: The disadvantages of lease financing from lessee’s point of view are given below: Compulsion: Finance lease is non-cancellable and even if a company does not want to use the asset, lessee is required to pay the lease rentals. Ownership: The lessee will not become the owner of the asset at the end of lease agreement unless he decides to purchase it. Costly: Lease financing is more costly than other sources of financing because lessee has to pay lease rental as well as expenses incidental to the ownership of the asset. Understatement of Asset: As lessee is not the owner of the asset, such an asset cannot be shown in the balance sheet which leads to understatement of lessee’s asset.
  17. 17. THANKYOU

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