Financial services

Topic :- leasing

By
Utkarsh Rajput
919044
B.b.a-5
National post graduate college
Leasing
Leasing is a process by which a firm can obtain the use of certain fixed assets for which it must pay a series of contractual, periodic, tax deductible
payments. It is a contract between the funder (lessor) and the end-user (lessee) for the acquisition and use of an asset and/or solution and (if
included) any associated costs, such as maintenance in return for payment over an agreed period (Padley and Dixon, 2005). In other words, leasing is
a form of financial activity associated with the transfer of capital goods for temporary use for a defined time against payment.

A Lease can be defined as a contract where a party being the owner (lessor) of an asset (leased asset) provides the asset for use by the lessee at a
consideration (rental), either fixed or dependent on any variables, for a certain period (lease period), either fixed or flexible, with an understanding
that at the end of such period, the asset, subject to the embedded options of the lease, will either be returned to the lessor or disposed off as per the
lessor’s instructions.

Leasing is nothing more than a method of paying for the use of an asset over a specified period of time. Though it seems very similar to the concept of
renting, they are very different.
 parties in lease contract

1. Lessor: Lessor is the holder or the owner of the property or land to be leased. It
can be an individual or any legal entity.

2.Lessee: The person who is taking the property or land in a lease by paying money
for a certain period is termed as lessee. Any person or entity who is in need of
property or land can be a lessee.
lease agreement
Before moving into a rental property, many landlords require their tenants to sign lease agreements. A lease is a contract between a tenant and
landlord that gives a tenant the right to live in a property for a fixed period of time, typically covering a 6- or 12-month rental period. A contract
between the landlord and tenant binds the parties to the lease.

Residential leases are tenant contracts that define in clear, thorough terms the expectations between landlord and tenant, including rent, rules
regarding pets, and duration of agreement. A strong, well thought out, and well-worded lease contract can help ensure both parties’ best interests
are protected, as neither can alter the agreement without written consent from the other.
 process of leasing
(1) Lease Selection –
The leasing process starts when the lessee enters into a leasing contract with the lessor.
Lessee approaches the Manufacturers and Suppliers, gathers all details about the required asset (design, specifications, price, installation, warranty,
servicing etc.) and then takes a decision on the required asset and the supplier
The lessee then goes to the leasing company or broker (lessor) and a lease agreement is broadly negotiated and finalized between them.

(2) Order, Delivery and payment –

In the next step of leasing process:
The Lessor orders the required asset to the selected manufacturer of asset to be leased on behalf of the lessee.
The manufacturer delivers the asset at the site of the lessee
The lessee inspects the delivery and gives a notice of acceptance to the lessor if he is satisfied with the asset.
(3) Lease contract –

The most important part of the leasing process is the lease contract:

Both the parties sign a lease agreement setting out the details of the terms of contract. It usually ranges from 3 to 5 years.
It may be fully payout lease or nominal rentals may be charged.

(4) Lease Period –

Regular lease rental are paid by the lessee.

Lessee ensures proper maintenance of asset.
Lessee is entitled to warranties and after sale services from the lessor.
At the end of the lease period the lessee may either renew the lease or terminate it or buy the asset.
(5) Lease Agreement –

The lease agreement consists of all the obligations of the lessor and lessee. It includes:

The basic lease period during which lease is irrevocable

The time and amount of periodic rental payments to be paid
Details of options to renew the asset or purchase it or in absence of such an option the lessor takes the possession of the asset
Details regarding the responsibility of payment of cost of maintenance and repairs, taxes, insurance and other expenses
In a Net Lease Agreement – Lessee pays all the above costs
In a Maintenance lease agreement – Lessor pays all the costs
operating lease
Operating lease is an agreement which gives the right to use assets, but does not give the right of ownership of an asset. Leased assets and liabilities
related to leased assets are not included in the company’s balance sheet; therefore, operating lease is considered as off-balance sheet financing.
Examples of such assets are aircraft, real estate, vehicles, or any heavy machinery.
Many organizations approach this type of lease for better financial terms, or they don’t have that much financial aid, and in case companies want to
replace their assets. In an operating lease, the lessee has unlimited access to the leased asset, but it only has to keep it in better condition.
After the end of the operating lease, ownership remains with the lessor, but the lessee can return the assets or renew the lease or lessee may purchase the
leased asset.
An operating lease is a lease that allows the borrowing party to keep its leased asset out of its accounting balance sheet, and pay rent on it. The leased
asset is not capitalized.
 financial lease
A finance lease, also referred to as a capital lease or sales lease, is a type of commercial lease in which a finance company is the legal owner of an

asset, and the user rents the asset for an agreed-upon period of time. In this legal contract, the leasing company, usually the finance company, is

called the lessor, and the user of the asset is called the lessee.

When a lessee enters into this agreement, they have operating control over the asset. They take responsibility for all the risks and rewards associated

with the ownership of the asset. For accounting purposes, the lease provides the lessee with economic characters of ownership of the asset.

The lessee will record the asset as a fixed asset in their general ledger. In this situation, the lessee will record the interest of the lease payment as an

expense.
 sale and lease back
Sale and Leaseback is a simple financial transaction which allows a person to lease an asset to himself after selling it. Under the transaction, an asset
previously owned by the seller is sold to someone else and is leased back to the first owner for a long term. The transaction thus allows a person to be
able to use the asset and not own it. One usually makes a leaseback transaction for high value fixed assets such as real estate and goods like airplanes
and trains. Sale and leaseback is shortly called as leaseback.
For example, X owns a land. Under the leaseback transaction, X will sell the land to Y and will get a lease on the same land from Y for a long term.
Sale and Leaseback transactions are common in the Real estate investment trusts (REITs) and Aviation industry.

The person who buys the assets and lets out on lease is called the investor or landlord. The seller of the asset is also the lessee.

A safe deposit vault given by banks is the classic example to quote. Here banks which initially are the owners of the vaults, sell the vaults to a leasing
company at market price which is substantially higher than the book value. Subsequently, the leasing company will offer back these vaults to the same
banks on long term basis. The banks will then sub-lease these vaults to its customers.
 domestic and offshore lease

Domestic Lease: When all the parties to the lease agreement Viz. Lessor, lessee and the equipment supplier are domiciled or belongs to the same
country, is called as a domestic lease.

Offshore Lease: The international lease refers to the type of lease agreement where one or more parties to the lease agreement reside or are domiciled
in different countries.

The major difference between the domestic lease and international lease is that the latter is exposed to two types of risks: country risk and the
currency risk. Country risk refers to the tax and the regulatory framework prevalent in the country concerned, and the currency risk means the risk
involved in the fluctuations in the exchange rate as the payments tend to be denominated in different currencies.