LEASING

Compiled to Fulfill the Duties of Advanced Financial Management Courses

Lecturer: Prof. Dr. Isti Fadah, M.Si.

Authored By:

Yossy Eka Pradita (190810201146)

Galuh Dewandaru Al Amanah (190810201154)

DEPARTMENT OF MANAGEMENT
FACULTY OF ECONOMICS AND BUSINESS
THE UNIVERSITY OF JEMBER
2021
 CHAPTER I
INTRODUCTION

1.1 Background
To run a business then we need not a little capital. Moreover, we also need
capital goods to run a business, so that we can run a business smoothly then we
need an institution to obtain a business fund, this institution is called leasing.
Leasing or lease-to-business is any financing activity of the company in the
form of provision of capital goods for use by a company for a certain period of
time, based on periodic payments accompanied by the right of choice for the
company to purchase the capital goods concerned or extend the period of leasing
based on the value of the remaining money that has been mutually agreed. By
leasing the company can obtain capital goods by way of lease to be directly used
in production, which can be paid monthly, quarterly or once every six months to
the lessor.

1.2 Problem Formulation

1. What the definition of leasing?
2. What the elements of leasing?
3. What the types of leasing?
4. What the advantages of leasing?
5. What the financial statement effects?
6. What the other factors that affect leasing decisions?

1.3 Purpose
1. To know the definition of leasing
2. To know the elements of leasing
3. To know the types of leasing
4. To know the advantages of leasing
5. To know the financial statement effects
6. To know the other factors that affect leasing decisions
 CHAPTER II
DISCUSSION

2.1 The Definition of Leasing

Lease may be defined as a contractual arrangement in which a party owning
an asset provides the asset for use to another, the right to use the assets to the user
over a certain period of time, for consideration in form of periodic payment, with
or without a further payment.
According to the equipment leasing association of UK definition, leasing is
a contract between the lesser and the leaser for hire of a specific asset selected
from a manufacturers or vender of such assets by the lessee. The leaser retains the
ownership of the asset. The leassee pass possession and uses the asset on payment
for the specified period.
Firms generally own fixed assets and report them on their balance sheets,
but it is the use of buildings and equipment that is important, not their ownership
per se. One way of obtaining the use of assets is to buy them, but an alternative is
to lease them. Leasing was originally associated with real estate—land and
buildings. Today, however, it is possible to lease virtually any kind of fixed asset.
According to Global Leasing Report 2017 leasing activity in 2016 was estimated
to be worth $1 trillion; however, many of these leases did not show up on any
balance sheet.

2.2 The Elements of Leasing

Leasing is one of the important and popular parts of asset based finance. It
consists of the following essential elements. One should understand these
elements before they are going to study on leasing.
1. Parties: These are essentially two parties to a contract of lease financing,
namely the owner and user of the assets.
2. Leaser: Leaser is the owner of the assets that are being leased. Leasers may be
individual partnership, joint stock companies, corporation or financial institutions.
3. Lease: Lease is the receiver of the service of the assets under a lease contract.
Lease assets may be firms or companies.
4. Lease broker: Lease broker is an agent in between the leaser (owner) and
lessee. He acts as an intermediary in arranging the lease deals. Merchant banking
divisions of foreign banks, subsidiaries indian banking and private foreign banks
are acting as lease brokers.
5. Lease assets: The lease assets may be plant, machinery, equipments, land,
automobile, factory, building etc.

2.3 The Types of Leasing

Leasing, as a financing concept, is an arrangement between two parties for a
specified period. Leasing may be classified into different types according to the
nature of the agreement. The following are the major types of leasing as follows:
(A) Lease based on the term of lease
1. Finance Lease
2. Operating Lease
(B) Lease based on the method of lease
1. Sale and lease back
2. Direct lease
C) Lease based in the parties involved
1. Single investor lease
2. Leveraged lease
(D) Lease based in the area
1. Domestic lease
2. International lease

1. Financing lease
Financing lease is also called as full payout lease. It is one of the long-
term leases and cannot be cancelable before the expiry of the agreement. It means
a lease for terms that approach the economic life of the asset, the total payments
over the term of the lease are greater than the leasers initial cost of the leased
asset. For example: Hiring a factory, or building for a long period. It includes all
expenditures related to maintenance.
Financial leases, sometimes called capital leases, are differentiated from
operating leases in three respects: (1) They do not provide for maintenance
services, (2) they are not cancelable, and (3) they are fully amortized (i.e., the
lessor receives rental payments that are equal to the full price of the leased
equipment plus a return on the investment). In a typical financial lease, the firm
that will use the equipment (the lessee) selects the specific items it requires and
negotiates the price and delivery terms with the manufacturer. The user firm then
negotiates terms with a leasing company and once the lease terms are set, arranges
to have the lessor buy the equipment from the manufacturer or the distributor.
When the equipment is purchased, the user firm simultaneously signs the lease
contract.
Financial leases are similar to sale-and-leaseback arrangements, the major
difference being that the leased equipment is new, and the lessor buys it from a
manufacturer or a distributor instead of from the user-lessee. A sale and leaseback
may thus be thought of as a special type of financial lease, and both sale and
leasebacks and financial leases are analyzed in the same manner.
2. Operating lease
Operating lease is also called as service lease. Operating lease is one of the
short-term and cancelable leases. It means a lease for a time shorter than the
economic life of the assets, generally the payments over the term of the lease are
less than the leaser’s initial cost of the leased asset. For example: Hiring a car for
a particular travel. It includes all expenses such as driver salary, maintenance,
fuels, repairs etc.
Operating leases, sometimes called service leases, provide for both
financing and maintenance. IBM is one of the pioneers of the operating lease
contract, and computers and office copying machines, together with automobiles
and trucks, are the primary types of equipment involved. Ordinarily, these leases
call for the lessor to maintain and service the leased equipment and the cost of
providing maintenance is built into the lease payments.
 Another important characteristic of operating leases is the fact that they are
frequently not fully amortized; in other words, the payments required under the
lease contract are not sufficient to recover the full cost of the equipment.
However, the lease contract is written for a period considerably shorter than the
expected economic life of the leased equipment, and the lessor expects to recover
all investment costs through subsequent renewal payments, through subsequent
leases to other lessees, or through the sale of the leased equipment.
A final feature of operating leases is that they frequently contain a
cancellation clause, which gives the lessee the right to cancel the lease before the
expiration of the basic agreement. This is important to the lessee, for it means that
the equipment can be returned if it is rendered obsolete by technological
developments or is no longer needed because of a decline in the lessee’s business.
3. Sale and lease back
Sale and lease back is a lease under which the leasee sells an asset for cash
to a prospective leaser and then leases back the same asset, making fixed periodic
payments for its use. It may be in the firm of operating leasing or financial
leasing. It is one of the convenient methods of leasing which facilitates the
financial liquidity of the company.
Under a sale and leaseback, a firm that owns land, buildings, or equipment
sells the property and simultaneously executes an agreement to lease the property
back for a specified period under specific terms. The purchaser could be an
insurance company, a commercial bank, a specialized leasing company, or even
an individual investor. The sale-and-leaseback plan is an alternative to taking out
a mortgage loan.
The firm that is selling the property, or the lessee, immediately receives
the purchase price put up by the buyer, or the lessor.7 At the same time, the
sellerlessee firm retains the use of the property as if it had borrowed and
mortgaged the property to secure the loan. Note that under a mortgage
arrangement, the financial institution would normally receive a series of equal
payments that amortized the loan while providing a specified rate of return to the
lender on the outstanding balance. Under a sale-and-leaseback arrangement, the
lease payments are set up exactly the same way; the payments return the purchase
price to the investor-lessor while providing a specified rate of return on the
lessor’s outstanding investment.

4. Direct lease
When the lease belongs to the owner of the assets and users of the assets
with direct relationship it is called as direct lease. Direct lease may be Dipartite
lease (two parties in the lease) or Tripartite lease. (Three parties in the lease)
5. Single investor lease
When the lease belongs to only two parties namely leaser and it is called
as single investor lease. It consists of only one investor (owner). Normally all
types of leasing such as operating, financially, sale and lease back and direct lease
are coming under this categories.
6. Leveraged lease
This type of lease is used to acquire the high level capital cost of assets
and equipments. Under this lease, there are three parties involved; the leaser, the
lender and the lessee. Under the leverage lease, the leaser acts as equity
participant supplying a fraction of the total cost of the assets while the lender
supplies the major part.
7. Domestic lease
In the lease transaction, if both the parties belong to the domicile of the
same country it is called as domestic leasing.
8. International lease
If the lease transaction and the leasing parties belong to the domicile of
different countries, it is called as international leasing.

2.4 The Advantages of Leasing