concepts of leasing for beginners.

1. Types of leasing and
hire-purchase
Submitted to: Submitted by:
Ms :Pooja puri Maninder Singh
jasmine
MBA 3rd sem

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Financing lease
• A finance lease or capital lease is an a commercial
arrangement where:
• The lessee (customer or borrower) will select
an asset (equipment, vehicle, software);
• The lessor (finance company) will purchase that asset;
• The lessee will have use of that asset during the lease;
• The lessee will pay a series of rentals or installments
for the use of that asset;

3. • The lessor will recover a large part or all of the cost of
the asset plus earn interest from the rentals paid by the
lessee;
• The lessee has the option to acquire ownership of the
asset (e.g. paying the last rental, or bargain option
purchase price);
The finance company is the legal owner of the asset
during duration of the lease.
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4. Features
 It's not cancel-able.
 The lessor may or may not bear the cost of insurance,
repair, maintenance etc. Usually the lessee has to bear all
cost.
 The lessor may transfer ownership of the asset to the
lessee by the end of the lease term.
 The lessee has an option to purchase the asset at a price
which is expected to be sufficiently lower than the value
at the end of the lease period
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5. Operating lease
• Definition: Operating lease is a contract wherein the
owner, called the Lessor, permits the user, called the
Lessee, to use of an asset for a particular period which
is shorter than the economic life of the asset without
any transfer of ownership rights. The Lessor gives the
right to the Lessee in return for regular payments for
an agreed period of time.
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6. Example of operating lease
• An example of operating lease would be when a person
is starting his or her own manufacturing business but
he or she does not have enough cash to buy machinery
then the person will take machinery on operating lease.
Operating lease is that lease which allows lessee to use
the assets for short period of time.
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7. Features of operating lease
• Operating lease is a short term arrangement for the use
of asset between the lessee and the owner of the asset.
• Various costs related to that asset like maintenance,
taxes etc…. are paid by the owner of the asset.
• The term of operating lease is always shorter than the
economic life of that asset.
• The lessee can cancel the operating lease prior to the
end date of the operating lease.
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8. • The terms related to an operating lease can vary
significantly depending upon the agreement between
the lessee and the owner of the asset.
• The rent which is paid by the lessee for the duration of
the operating lease is lower than the cost of asset.
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9. Forms of financial lease
1. Sales and lease back.
2. Direct leasing.
3. Leveraged leasing.
4. Straight lease and modified lease.
5. Primary lease.
6. secondary lease
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10. 1. Sales and leaseback:
A sale and leaseback constitutes an arrangement
where the seller of an asset leases back the same asset
from the purchaser.
The lease arrangement is made immediately after the
sale of the asset with the amount of the payments and
the time period specified. Essentially, the seller of the
asset becomes the lessee and the purchaser becomes the
lessor in this arrangement.
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11. 2. Direct leasing:
A contractual financing arrangement in which the lessor,
typically a bank, purchases the property directly from the
manufacturer and leases that property to the lessee.
3.Leveraged lease:
A lease agreement that is partially financed by the lessor
through a third-party financial institution. In a leveraged
lease, the lending company holds the title to the leased
asset, while the lessor creates the agreement with the
lessee and collects the payment. The payments are then
passed on to the lender.
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12. • In a leveraged lease, if the lessee stops making
payments to the lessor, then the lessor stops making
payments to the financial institution (lender). This
allows the lender to repossess the property.
• The lessor may also have the right to retain the
property upon lessee default, as long as the lessor
continues making payments to the lender.
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13. 4. Straight lease:
A lease agreement which specifies an amount of rent that
should be paid regularly during the complete term of the
lease. Also called a flat lease.
5. Modified lease:
A lease agreement provides several options to the lessee
during the lease period.
For example: terminating the lease, purchasing asset.
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14. 6. Primary lease: Equipment or property lease in which
the rental payments are higher in the
beginning periods, and go down as the lease
period nears its end.
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15. Other types of leases
1. Floating rental rate lease contracts.
2. Domestic lease
3. International lease.
4. Sale –Aid lease
5. Foreign to foreign lease.
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16. 1. Floating rental rate lease contracts:
Under this type of lease, lease rentals are reduced or
increased according to the borrowing rates by the
lessor.
2. Domestic lease:
When all the parties of the lease agreement reside in
the same country, it is called domestic lease.
3. International lease:
When all the parties of the lease agreement reside in the
different countries, it is called international lease.
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17. International lease of further of two types:
a) Import lease:
When lessor and lessee reside in same country and
equipment supplier stays in different country, the
lease arrangement is called import lease.
b) Cross border lease:
When the lessor and lessee are residing in two
different countries and no matter where the
equipment supplier stays, the lease is called cross
border lease.
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18. 4. Sale –Aid leasing:
Under this type of leasing, a manufacturer directly
extends facility of leasing either by one of his own
subsidiaries or by third party.
5. Foreign to foreign lease:
under this type of lease three parties are involved:
a) The manufacturer (who is in one country).
b) Lessor ( who is in another country).
c) lessee ( in the third country).
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19. For example:
China is the manufacturing country and it exports
machinery to Indian based leasing company which
further lease it to Australian based firm.
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20. Tax aspect of leasing
• Lessor:
– Deduction of depreciation from taxable income
– Income from lease rentals is taxable under “Profits and Gains of
Business and Profession”
– Deductible expenses:
• Depreciation
• Rent, rates, taxes, repairs and insurance
• Amortization of preliminary expenses
• Interest on borrowed capital
• Bad debts
• All expenses incurred in furtherance of business
• Entertainment expenses (with a cap)
• Travel expenses (as per approved norms)
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21. •Lessee:
– Deductibility of Incidental Expenses – Repairs,
Maintenance, Insurance, Finance
Charges,…(Incidental)
Installation expense (revenue expense in the year of
incurrence)
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22. Hire purchase
Hire purchase means a transaction where goods and
services are purchased and sold on the terms that,
1. Payment will be made in installments.
2. The possession of the goods is given to the buyer
immediately.
3. The ownership in the goods remains with the vendor
till the last installment is paid.
4. The seller can repossess the goods in case of default
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23. In the payment of any installment.
5. Each installment is treated as hire charges till the last
installment is paid.
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24. Features of Hire Purchase
The main features of hire purchase finance are:
1. The hire purchaser becomes the owner of the asset after
paying the last installment.
2. Every installment is treated as hire charge for using
the asset.
3. Hire purchaser can use the asset right after making the
agreement with the hire vendor.
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25. 4.The hire vendor has the right to repossess the asset in
case of difficulties in obtaining the payment of
installment.
• Advantages of Hire Purchase:
• Hire purchase as a source of finance has the following
advantages:
• i. Financing of an asset through hire purchase is very
easy.
• ii. Hire purchaser becomes the owner of the asset in
future.
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26. • iii. Hire purchaser gets the benefit of depreciation on
asset hired by him/her.
• iv. Hire purchasers also enjoy the tax benefit on the
interest payable by them.
• Disadvantages of Hire Purchase:
• i. Ownership of asset is transferred only after the
payment of the last installment.
• ii. The magnitude of funds involved in hire purchase
are very small and only small types of assets like office
equipment’s, automobiles, etc., are purchased through
it.
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27. iii. The cost of financing through hire purchase is very
high.
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28. Difference between Lease and hire-purchase
Ownership of the Asset:
• In lease, ownership lies with the lessor. The lessee has
the right to use the equipment and does not have an
option to purchase. Whereas in hire purchase, the hirer
has the option to purchase. The hirer becomes the
owner of the asset/equipment immediately after the
last installment is paid.
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29. Depreciation: In lease financing, the depreciation is
claimed as an expense in the books of lessor. On the
other hand, the depreciation claim is allowed to the
hirer in case of hire purchase transaction.
Rental Payments: The lease rentals cover the cost of
using an asset. Normally, it is derived with the cost of
an asset over the asset life. In case of hire purchase,
installment is inclusive of the principal amount and
the interest for the time period the asset is utilized.
•
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30. • Duration: Generally lease agreements are done for
longer duration and for bigger assets like land,
property etc. Hire Purchase agreements are done mostly
for shorter duration and cheaper assets like hiring a
car, machinery etc.
• Tax Impact: In lease agreement, the total lease rentals
are shown as expenditure by the lessee. In hire
purchase, the hirer claims the depreciation of asset as
an expense.
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31. • Repairs and Maintenance: Repairs and maintenance
of the asset in financial lease is the responsibility of
the lessee but in operating lease, it is the responsibility
of the lessor. In hire purchase, the responsibility lies
with the hirer.
• Extent of Finance: Lease financing can be called the
complete financing option in which no down payments
are required but in case of hire purchase, the normally
20 to 25 % margin money is required to be paid
upfront by the hirer. Therefore, we call it a partial
finance like loans etc.
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