2. Contents
Meaning of lease .
Definition of lease.
Accounting standard – 19.
Lease contract and its parties.
Types of lease
Operating lease
Finance lease.
Advantages of leasing.
Disadvantages of leasing.
Conclusion .
3. MEANING OF LEASE
Lease is an agreement whereby the lessor
conveys to the lessee , in return for rent , the right
to use an asset for agreed period of time . The
lessor remains the owner of the asset , though the
lessee has an unrestricted right to use the
equipment. This lease contract is for specified
period of time and it will contain the amount and
timing of payment to be made by the lessee ,
provision of payment of taxes ,maintenance
expenses and provisions for renewal of the lease or
purchase of the asset at the expiry of the lease
period.
4. Definition of lease
According to James CVan Horne ,
“ A contract of 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 agreed period
of time in return for the payment
of rent.”
5. AS – 19 is applicable on leases issued by the council of
institute of chartered accountants of India . The basic
objective of this standard is to prescribe for lessees and
lessors , the appropriate accounting policies and disclosures
in there financial statements . This standard is applied in
accounting for all leases other than :
Lease agreement to explore for or use natural resources
such as oil, gas, metals and other mineral rights.
Licensing agreements for items such as motion pictures,
film video recording, patent and copyrights.
Lease agreement to use land.
7. Lease contract and its parties
Manufacturer /
Supplier of the
asset (from whom
the leased asset
is purchased)
Lessor or owner of the
asset (who purchase the
asset)
Lessee (who get the right to
use the asset not
ownership)
Contract of sale
Contract of lease
Asset Purchase
consideratio
n
Right
to use
Rent
9. Operating lease
It is also known as service lease or cancellable lease. An operating
lease is usually characterised by following features:
It is a short term lease. The lease period in such contract is less than
the useful life of the asset.
The lease is usually cancellable at short notice by lessee.
As a period of an operating lease is less than the useful life of the
asset , it does not necessary to amortize the original cost of the asset .
The lessee has the option of renewing the asset lease after the expiry
of lease period.
The lessor is generally responsible for maintenance, insurance and
taxes of the asset.
10.
11. FINANCE LEASE
It is also known as capital lease. A finance lease is usually
characterised by following features:
As compared to operating lease, a financial lease is for longer
period of time.
It is usually non - Cancellable by the lessee prior to its expiration
date.
The present value of the total lease rental payment during the
period of lease exceeds or equal to substantially the whole of the
fair value of the leased asset.
A financial lease usually provides the lessee an option of renewing
the lease for further period.
The lessee is generally responsible for the maintenance ,insurance
and taxes of the asset.
14. Advantages
of leasing to
the lessee
Minimum
delay
Easy source
of finance
Shifting the
risk of
obsolescence
Unaffected
borrowing
capacity
No effect of
inflation
15. Higher cost
No alteration or
change in asset
Penalties on
termination of
lease
Loss of salvage
value of the asset
Disadvantages
of leasing for
the lessee