LEASING

GROUP 9

DEFINITION
Lease

is a contract between a lessor, the owner of the

asset, and a lessee, the user of the asset.

Lease

Rental The lessor gives the right to the lessee

to use the asset over an agreed period of time for a consideration.

Lessee

pays the rental to the lessor as regular fixed

payments over a period of time.

Up-fronted lease - More rentals are charged in the

initial years and less in the later years of the contract.

Back-ended lease - Leasor is entitled to claim depreciation on the leased asset at the end of the lease contract.

Lease contract is divided into two parts -Primary lease Provides for the recovery of the cost of the asset and profit through lease rental. -Secondary lease Follows nominal lease rental.

TYPES OF LEASES
Operating Lease Short-term, cancellable lease agreements.

Operating lease may run for 3 to 5 years.

The lessor is generally responsible for maintenance and insurance. The shorter the lease period, the higher will be the lease rentals.

Eg: A tourist renting a car, lease contracts for computers,

office equipments, trucks and hotel rooms.

Financial Lease
Long-term, non-cancellable lease contracts. Financial leases amortise the cost of the asset over the term of lease, therefore called as capital or full-payment or direct leases. The lessee is normally responsible for maintenance and

insurance.
The lessee also bears the risk of obsolescence.

Eg : Plant, Machinery, Land, Building, Ships and aircraft.

DIFFERENCE
Term

FINANCIAL LEASE
Long term

OPERATING LEASE
Short term

Cancelability

Non-Cancelable

Cancelable

Lease period

Equal to life of the asset

Less than the life of asset

Transfer of all risk and return

Substantially transfers

Does not transfer substantially Payable by lessor

Maintenance, Insurance & Payable by lessee Taxes Asset Selection Selected by lessee

Selected by lessor

Lease Capitalization

In the books of lessee

In the books of lessor

TYPES OF FINANCIAL LEASE

Leveraged lease
Involves lessor, lessee and financier. Lessor (leasing company) provides equity equal to

about 25% of the assets cost.

Financier (a bank or a financial institution) provides

the remaining amount mainly as loan.

Popular method of financing expensive assets.

Sale-and-lease-back
Special financial lease arrangement. A user may sell an(existing)asset owned by him to the

lessor(leasing company) and lease it back from him.

Provide substantial tax benefits.

Eg : SCICI purchased Great Eastern Shipping

Companys bulk carrier, Jag Lata, for Rs 12.5 crore

and then leased it back to them on a 5yr lease for

Rs.28.13 lakh pm. The ships written down book value was Rs.2.5 crore.

Cross-border lease
Lessor and lessee are situated in two different

countries.
Involves relationships and tax implications more

complex than the domestic lease. Foreign-to-foreign lease

The lease transaction takes place between three parties

manufacturer, lessor and lessee in 3 different

countries.

Other terms used by the leasing industry Closed and open ended lease Direct lease Master lease Percentage lease Wet and dry lease Net net net lease Update lease

ADVANTAGES OF LEASING

Convenience and flexibility Shifting of risk of obsolescence Maintenance and specialised services

Hire Purchase Financing

1.

Lease Financing
1.

2.

3.

Depreciation: Hire is entitled to claim depreciation tax shield. Hire purchase payments: It includes interest and repayment of principle. Hirer gets tax benefits only on the interest. Salvage value: Once the hirer has paid all installments, he becomes the owner of the asset and can claim salvage value.

2.

3.

Lessee is not entitled to claim depreciation tax shield. Lease payments: Lessee can charge the entire lease payments for tax purposes. Thus, he saves tax on the lease payment. Lessee does not become owner of the asset. Therefore, he has no claim over the assets salvage value.

CONTENTS OF A LEASE AGREEMENT

1.Description of the lessor, the lessee and the equipment. 2.Amount, time and place of lease rental payments. 3.Time and place of equipment delivery. 4.Lessees responsibility for taking delivery and possession of the leased equipment. 5.Lessees responsibility for maintenance, repairs, registration etc.

6.Lessee enjoys the benefits of the warranties.

7.Insurance to be taken by the lessee

8.Variations in lease rentals if there is a change in external factors. 9.Option of lease renewal for the lessee 10.Return of equipment on expiry of the lease period 11.Arbitration procedure in the event of dispute.

LEASING COMPANIES IN INDIA

Sundaram Finance Cholamandalam Finance Mahindra & Mahindra GE Capital Shriram Finance TATA Finance Citicorp

THANK YOU