financial service

1. Financial Services
Lesson-2

2. Contents
• Equipment Leasing: Overview, Legal & Tax Aspects
• Lease Evaluation,
• Lease Accounting, Recent Development, International
Leasing.

3. Equipment Leasing: Overview, Legal
& Tax Aspects
• Leasing is a process by which a firm can obtain the use of a certain fixed
assets for which it must pay a series of contractual, periodic, tax
deductible payments.
• The lessee is the receiver of the services or the assets under the lease
contract and the lessor is the owner of the assets.
• The relationship between the tenant and the landlord is called a
tenancy, and can be for a fixed or an indefinite period of time (called the
term of the lease). The consideration for the lease is called rent.
• Lease can be defined as the following ways:
• A contract by which one party (lessor) gives to another (lessee) the use
and possession of equipment for a specified time and for fixed
payments.
• The document in which this contract is written.
• A great way companies can conserve capital.
• An easy way vendors can increase sales.

4. • As there is no separate statue for equipment leasing in India, the
provisions relating to bailment in the Indian Contract Act govern
equipment leasing agreements as well section 148 of the Indian
Contract Act defines bailment as:
• “The delivery of goods by one person to another, for some purpose,
upon a contract that they shall, when the purpose is accomplished, be
returned or otherwise disposed off according to the directions of the
person delivering them.
• The person delivering the goods is called the ‘bailor’ and the person to
whom they are delivered is called the ‘bailee’.
• Since an equipment lease transaction is regarded as a contract of
bailment, the obligations of the lessor and the lessee are similar to those
of the bailor and the bailee (other than those expressly specified in the
least contract) as defined by the provisions of sections 150 and 168 of
the Indian Contract Act.
• Essentially these provisions have the following implications for the
lessor and the lessee.

5. • The lessor has the duty to deliver the asset to the lessee, to legally
authorize the lessee to use the asset, and to leave the asset in
peaceful possession of the lessee during the currency of the
agreement.
• The lessor has the obligation to pay the lease rentals as specified in
the lease agreement, to protect the lessor’s title, to take reasonable
care of the asset, and to return the leased asset on the expiry of the
lease period.
• Contents of a lease agreement:
• The lease agreement specifies the legal rights and obligations of the
lessor and the lessee. It typically contains terms relating to the
following:
• Description of the lessor, the lessee, and the equipment.
• Amount, time and place of lease rentals payments.
• Time and place of equipment delivery.
• Lessee’s responsibility for taking delivery and possession of the
leased equipment.
• Lessee’s responsibility for maintenance, repairs, registration, etc.
and the lessor’s right in case of default by the lessee.
• Lessee’s right to enjoy the benefits of the warranties provided by the
equipment manufacturer/supplier.

6. Lease Evaluation
• Once a firm has evaluated the economic viability of an asset as an
investment and accepted/selected the proposal, it has to consider
alternate methods of financing the investment. However, in making an
investment, the firm need not own the asset. It is basically interested
in acquiring the use of the asset.
• Thus, the firm may consider leasing of the asset rather than buying it.
In comparing leasing with buying, the cost of leasing the asset should
be compared with the cost of financing the asset through normal
sources of financing, i.e., debt and equity.
• Since, payment of lease rentals is similar to payment of interest on
borrowings and lease financing is equivalent to debt financing,
financial analysts argue that the only appropriate comparison is to
compare the cost of leasing with that of cost of borrowing.
• Hence, lease financing decisions relating to leasing or buying options
primarily involve comparison between the cost of debt-financing and
lease financing.

7. Evaluation of leasing
• ABC LTD.
• Project of expansion of production capacity
• 400 units now 500 units
• New machine(factory)
• Rs 20,00,000 lac.
• Analysis (economic viability)
• Profit, production workers, resources (raw material and other
sources)
• Economy,demand,gdp,industry
,competiotors,political,ecological,enviornment legal,technological
• Finance (debt /equity).
• Debt loan bank SBI (10%)
• Equity(profits)
• How (buy lease hire purchase)

8. • Cost of financing(buying by taking loan)
• Cost of leasing (lease rentals , maintainance
charge)
• Cost of leasing > cost of financing
• Decision:Financing
• Cost of leasing < cost of financing
• Decision: Leasing

9. • The evaluation of lease financing decisions from
the point of view of the lessee involves the
following steps:
• (i) Calculate the present value of net-cash flow of the
buying option, called NPV (B).
• (ii) Calculate the present value of net cash flow of the
leasing option, called NPV (L)
• (iii) Decide whether to buy or lease the asset or reject the
proposal altogether by applying the following criterion:
• (a) If NPV (B) is positive and greater than the NPV (L),
purchase the asset.
• (b) If NPV (L) is positive and greater than the NPV (B),
lease the asset.
• (c) If NPV (B) as well as NPV (L) are both negative, reject
the proposal altogether.
• Since many financial analysts argue that the lease
financing decisions arise only after the firm has made an
accept-reject decision about the investment; it is only the
comparison of cost of leasing and borrowing options.

10. Lease Accounting, Recent
Development, International Leasing
• Lease accounting is the process by which a company records the
financial impacts of its leasing activities. Leases that meet specific
classification requirements must be recorded on a company’s financial
statements. Here’s a brief review of each financial statement:
• Balance sheets track a company’s assets, liabilities, and shareholder
equity and must always balance.
• Cash flow statements show the movement of money into and out of a
company during a specific period.
• Income statements track a company’s income and expenses over time.
• The way a lease is recorded on each financial statement differs based on
whether you’re the lessor (you own the asset and are receiving payment
from the lessee) or the lessee (you’re paying to use the lessor’s asset).
When recorded correctly, these three documents provide a clear picture
of the value of a company’s assets and the impact the lease has on its
overall financial health.

11. Lease accounting(lessee)
who is using asset
• Balance sheet(end of year statement)
• Lease of machinery
• Asset liabilities
◦ Capital
◦ Profit
◦ Loans
◦ creditors

12. • Recording (financial transaction is noted in the
books of accounting)
• Journal
• Ledger
• Trial Balance
• Final accounts(trading and P and L account)
• Cash fund flow statement
• Balance sheet

13. • The global leasing landscape in emerging markets is still very diverse today,
with nascent leasing industries in the poorest countries in Africa and Asia,
and maturing leasing markets in the most advanced economies of Latin
America and Eastern Europe.
• It remains critical to develop a vibrant leasing industry in countries where it
does not exist. Leasing fosters economic development and job creation, by
providing access to financing to micro, small and medium businesses that
often cannot access other forms of financing.
• In countries where the leasing market has already built up, encouraging
competition can help lower financing rates and expand financing volumes.
At this stage, banks generally enter the leasing competition and start using
leasing as a way to attract new clients, while stand-alone leasing companies
are pushed to develop more specialized products and niches.
• Even in markets where leasing is reaching maturity, new products offer
opportunities for further growth. For the IFC, one of the most promising
avenues for leasing in developing countries is still under-exploited—the
rapid growth of investments in sustainable equipment (i.e. energy
efficiency, renewable energy, and cleaner production).

14. • These investments are critical to successfully tackle the
global climate change challenge, and are supported by a
strong political will worldwide.
• Because leasing is asset-backed and generally cash-flow
based, it is a particularly relevant product to finance
these equipments.
• IFC supports sustainable equipment financing by
combining credit lines and risk-sharing facilities with
advisory services that aim at building the capacity of
leasing firms to identify opportunities, develop business,
and appraise the risks and cash-flows of different types
of equipments and sub-sectors.

15. THANK YOU