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12 Leasing PDF
12 Leasing PDF
LEASE FINANCING
1.INTRODUCTION
Leasing is a device for financing the cost of an asset .It is the method of financing where huge Capital
Outlays are substituted by periodical rental payments .In other words a lease is an agreement whereby one
party (i.e the owner of an asset ) grants the other party , the right to use the asset , in return for a periodic
payment .
Leasing all over the world is becoming an important source of financing assets.
For calculating Equal Annual Loan Inclusive Of Interest we will use following formula :
Cost Of Asset ( or Loan Taken If It Differs)
PVAF (r %, n years)
Where r = pre tax required return by money lender i.e the party giving the loan
13.TREATMENT OF DEPRECIATION :
Depreciation can be calculated in the following manner :
(i) Straight Line Method (SLM)
(ii) Written Down Value (WDV).
(iii)Sum Of Years Digit Method
(iv)Modified Accelerated Cost Recovery System (MACRS)
Depreciation is charged by the owner of the asset.
Under Lease Agreement it is the lessor who claims the depreciation and Under Loan Agreement it is
charged by the Borrower.
Depreciation is not an item of Cash Outflow,hence it should not be considered for our analysis.
However Tax Saving on depreciation is an item of inflow and hence must be recognized .
Tax Saving On depreciation = Amount Of Depreciation x Tax Rate
In case of cross-border or international lease, the lessor and the lessee are situated in two different countries.
Because the lease transaction takes place between parties of two or more countries, it is called cross-border
lease.
16.TREATMENT OF TAXATION :
All cash inflows and outflows which are a part of Profit and Loss account should be taken after tax.