The document defines leasing, including various types such as financial and operating leases, and outlines the parties involved (lessor and lessee) along with key characteristics. It discusses different lease structures like net leases, consumer leasing, and financial lease variants, as well as the benefits and limitations for both lessors and lessees. The document also addresses myths about leasing and describes the leasing process and the roles of different participants.

1. Leasing
Ms. S.V. Mohana Sujana
Asst Professor
Department of Commerce

2. Definition
According to Institute of Chartered Accountants of India, “a lease is an agreement
whereby the lessor conveys to the lessee, in return for rent, the right to use an asset for an
agreed period of time. Lessor is a person who conveys to another person (lessee) the right
to use an asset in consideration of a payment of periodical rental, under a lease agreement.
Lessee is a person who obtains from the lessor, the right to use the asset for a periodical
rental payment for an agreed period of time”

3. Characteristics of Lease
• Parties to lease agreement
• Lease asset
• Lease term
• Lease rentals

4. Financial lease
• According to institute of chartered accountants of India , “financial lease is a
lease under which the present value of he minimum lease payments at the
inception of the lease exceeds or is equal to substantially the whole of the
fair value of the leased asset”
• Non cancellable in nature
• Responsible for the maintenance of the asset leased
• Variants includes full payout lease & true lease

5. Financial Lease
• Full payout lease , “the lessor recovers the full value of the leased asset,
within the period of the lease, by way of lease rentals and the residual value.”
• True lease is the type of lease, the typical tax related benefits such as
investment tax credit, depreciation on tax shields, etc are offered to the
lessor.

6. Operating Lease
• Operating lease is any other type of lease whereby the asset is not fully
amortized during the non cancellable period of the lease, and where the
lessor does not rely on the lease rentals for profits
• Basically an economic service
• Short term lease on a period to period basis
• Period of lease less than the useful life of the asset

7. Types of Lease
• Net Lease is a type of lease when the lessor is not concerned with the repairs
and maintenance of the leased asset is known as net lease.
• Conveyance type lease is a very long tenure lease applicable to immovable
properties. The intention of the lease is to convey title in property. Such
leases are entered into for period which may be long as 99 years or 999 years.
• Leveraged lease is when a part or whole of the financial requirement
involved in a lease are arranged with the help of financier it takes the form
of leveraged lease.

8. Types of Lease
• Sale and lease back is where the owner of the asset sells it to the lessor, and
gets the asset back under the lease agreement. The ownership of the asset
changes hands from the original owner to the lessor, who in turn leases the
asset , back to the original owner.
• Partial Payout lease is whereby the lessor obtains full payment of the lease in
several leases.

9. Types of Lease
• Consumer leasing is where leasing of consumer durables such as TV,
refrigerator etc.
• Balloon lease is a type of lease which has zero residual value at the end of
the lease period. It also means a lease where the lease rentals are low at the
inception, high during the mid years, and low again during the end of the
lease.
• Close end leasing is a leasing arrangement whereby the asset leased out is
reverted to the lessor which is also known as walk away lease.

10. Types of Lease
• Open end leasing is commonly used in automobile leasing in USA, it means a
lease agreement where the lessee guarantees that the lessor will realise a
minimum value from the sale of the asset at the end of the lease period.
• Swap leasing, the lessee is allowed to exchange equipment leased out
whenever the original asset has to be sent to the lessor for some repair or
maintenance
• When the lessee further subleases the asset to the end user, retaining a fee
and a share of the residual value, it is called wrap leasing.

11. Types of Lease
• Importing leasing is where the leasing of imported capital goods
• Cross border leasing is a type of lease where the lessor in one country leases
out assets to a lessee to another country
• When a leasing company operates in different countries through its branches,
it is a case of international leasing.

12. Financial Lease vs Operating Lease
• Specificity
• Ownership risk
• Obsolescence risk
• Cancelability
• Lease Period
• Maintenance
• Lessor’s service
• Payout

13. Leasing
Test for Financial Lease
• Substance test
• Full payment test
• Transfer of title test
• Lease term test
Myths about leasing
• 100% Financing
• Off balance sheet Financing
• Better financial performance
• No evaluation needed

14. Participants of Leasing
• Lessors
i. Specialised leasing
ii. One off lessors
iii. Manufacturer lessors
iv. Banks sponsored leasing companies
v. Financial institutions
• Lessees
• Lease Brokers
• Lease Financiers

15. Leasing Process
• Lease selection
• Order and delivery
• Lease contract
• Lease period

16. Services of lessor
• Provision of credit facility
• Absorbing obsolescence risks
• Comprehensive package

17. Advantages to lessor
• Stable business
• Wider distribution
• Sale of supplies
• Second hand market
• Tax benefits
• Absorbing obsolescence risks
• Fillip to capital market
• Easy finance
• Other benefits

18. Advantages to Lessee
• Efficient use of funds
• Cheaper source
• Flexible source
• Enhanced borrowed capacity
• Off balance sheet financing
• Tax benefits
• Favorable terms
• Guards against obsolescence
• Avoidance of initial cash outlay
• Better liquidity
• Other benefits

19. Limitations of Lease Financing
• Disguised debt financing
• Costly option
• Loss of tax shield
• Double sales tax
• Loss of residual value
• Unfavorable gearing
• No ownership
• Risk of default
• No working capital
• Indiscriminate finance
• Long term venture