Term paper on

Lease in Bangladesh
Course Title: Intermediate
Accounting II
Course Code: ACT 421
Section:
02

Submitted to:
Tania Hamid
Senior Lecturer
Department of Business
Administration East
1
West University.
Submitted By:
Md Tanvir Hasan Bhuiyan
ID: 2018-1-10-045
Department of Business
Administration

Term paper on Lease in Bangladesh

Course Title: Intermediate Accounting II

Course Code: ACT 421
Section: 01

Submitted to:
Tania Hamid
Senior Lecturer
Department of Business Administration East
West University.

2
 Submitted By:
Name ID
Nadia Islam 2019-1-10-270
Tajrin Anjum Sujana 2019-1-10-283

Abstract
One of the most important industries for any nation, especially one in development like
Bangladesh, is the banking sector. Different leasing companies are quite important at this
stage of Bangladesh's economic development. The leasing companies assist in offering asset
leases for the establishment of businesses and industries, which promotes the expansion of
our economy. Through various ratio analyses—an essential tool for assessing the financial
performance of any entity—this study has attempted to investigate the roles played by
various leasing firms and measure the financial performance of a few chosen leasing
companies from 2015 to 2017.

3
Acknowledgement
At first, I would like to express my deepest gratitude to my almighty for giving me the
strength and the composure to complete this report. These words are not enough to express
how grateful I am, but I really tried my level best to express my gratefulness toward.

This report might never have been completed without the assistance of our textbook, some
articles I took from websites to know the detailed information for gathering all the necessary
data to be added in the report that I want to present in here. I am fortunate to have been
surrounded by our course instructor Tania Hamid ma’am who have supported me on
completing this report. I would like to express my special gratitude to our honourable course
instructor Tania Hamid ma’am, for her supervision, co-operation, and advice. I will always
be indebted to her for the valuable suggestions and the time that she spent for guiding us
throughout this semester.

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Table of Contents

CHAPTER ONE: INTRODUCTION...............................................................................5-9

1.1: Definition of Lease………………………………………………………………..……..
1.2: Advantages of Lease………………………………………………………………..……
1.3: Classification of Lease……………………………………………………………………
1.4: Substance Over Form…………………………………………………………………….
1.5: Lease Ordinance…………………………………………………………………………

CHAPTER TWO: LITERATURE REVIEW.................................................................9-10

CHAPTER THREE: LEASING INDUSTRY OF BANGLADESH............................10-21
3.1: Overview of Leasing Companies in Bangladesh.....................................................10-11
3.2: Functions of the Assigned Leasing Companies.......................................................11-12
Industrial Development Leasing Company Limited..............................................................11
United Leasing Company Limited......................................................................................11-12
3.3: Ratio Analyses of the Assigned Leasing Companies...............................................12-21

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Quick Ratio .............................................................................................................................12
Interval Measure......................................................................................................................13
Operating Expense Ratio.........................................................................................................14
Return on Investment…………...............................................................................................15
Earnings per Share…………….............................................................................................. 16
Net Profit Margin ................................................................................................................... 17
Financial Expense Coverage....................................................................................................18
EBIT Margin Ratio..................................................................................................................19
Asset Turnover Ratio.............................................................................................................. 20
CHAPTER FOUR: CONCLUSION................................................................................... 21
CHAPTER FIVE: REFERENCE…………………………………………………………22

At first, I would like to express my deepest gratitude to my almighty for giving me the
strength
and the composure to complete this report. These words actually are not enough to express
how
grateful I am, but I really tried my level best to express my gratefulness toward.
CHAPTER ONE: INTRODUCTION

Lease is very important to confirm it totally addresses the rules, policies, and conflict

resolution procedures for living within the rental property, and clearly defines tenant
and property owner responsibilities. Bangladesh is a developing country, however the
national catastrophe and political unrest sluggish the economic growth yet as economic
process of the country. Despite this hindrance the expansion of leasing firms is
a vital indication of our bright prospects. Leasing has performed a main function within side
the control and monetary dynamics of a company. Its utility has by no means ceased
to unfold for innumerable reasons, amongst that is the ability of person groups to
procure critical long-time period manufacturing elements while not having to immobilize
their monetary resources. It helps the poor and unemployed people to use the land without
buying them. It helps them to be a part of the economy as they use the land for mostly
agricultural purpose.

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1.1: Lease Definition

A lease is a contract by which party transfers property for a period in exchange for money or
services. It guarantees the lessor of instalments for a predetermined duration in exchange for
the lessee's use of the property. There are two parties in lease. One is known as lessor, who
owns the property and another one is lessee, who rents the property from the lessor.

1.2: Advantages of Lease

1. 100% financing at fixed rates- Lease payments are generally fixed so even if there is
any inflation it does not affect the payments that the lessee is supposed to pay the
lessor.
2. Protection against obsolescence- The property is mainly owned by the lessor so if
there is any risk of obsolescence it will mainly affect the lessor not the lessee
3. Flexibility- In lease there are less restrictive terms than in other debt agreements may
be found in lease agreements. Innovative lessors can modify a lease to meet the
specific demands of the lessee.
4. Less costly financing- Leasing is cheaper than other forms of financing because the
lessee do not actually have to buy the property but still, they can use it at a fixed rate.
5. Tax advantages- Companies do not report an asset or a liability for the lease
arrangement so they get tax advantages.
6. Off-balance-sheet financing- Some leases increase borrowing capacity but do not
increase debt on a balance sheet or have an impact on financial ratios.

1.3: Lease Classification

Classification
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 Lessor Lessee

Financial/capital lease Financial/capital

lease
Operating lease Operating lease

Sales type lease

Financial/capital lease
In capital lease ownership might be transferred at the end of the lease term to the lessee.
There will be a bargain purchase option where the lessee can rent the property at less than the
fair value if lessor agrees.
A minimum of 75% of the estimated economic life of the leased property is covered by the
lease term.
The minimum lease payments' present value (excluding executory costs) is equal to or greater
than 90% of the leased property's fair value.
The lessee's ability to make the required payments is reassuringly predictable.
There aren't any significant uncertainties over how much the lessor will still have to
reimbursement under the lease.
Operating Lease
In operating lease, the property will be retained by the lessor at the end of the lease term.
There is no bargain option.
Lessor must bear all the risks related to the leased property.
A less than 75% of the estimated economic life of the leased property is covered by the lease
term.
The maximum lease payments' present value (excluding executory costs) is less than 90% of
the leased property's fair value.
If any repairment of the leased property is needed before the lease agreement, lessor have to
bear that cost as well.
Sales Type Lease terms
The present value of the minimum lease payments plus the present value of any residual
value that isn't guaranteed is known as lease receivables. Therefore, whether guaranteed or
not, the current value of the sales price is included in the lease receivable.
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The present value of the minimum lease payments is the asset's sale’s price.
Cost of goods sold is equal to the asset's cost to the lessor less the present value of any
residual value that isn't guaranteed.
1.4: Substance over form
Substance over form is a particular concern under generally accepted accounting principles
(GAAP), because it is mostly rule-based and establishes certain difficulties that must be
overcome in order to record a transaction in each way. It refers to the concept that a
company's financial statements and supporting disclosures should represent its economic
substance rather than its legal structure. The fact that a company truly owns a property if it
leases it for the most of its usable economic life and the fact that the financing organization,
the bank, does not view the property as its own despite having legal title, are both strong
arguments for content over form. The bank considers the agreement as a loan that must be
repaid throughout the period of the lease.

1.5: Lease Ordinance

Without a contract, local law, or custom to the contrary, a lease of immovable property for
agricultural or manufacturing purposes must be presumed to be a lease from year to year,
terminable by either lessor or lessee, by six months' notice ending with the end of a year of
the tenancy; and a lease of immovable property for any other purpose shall be deemed to be a
lease from month to month, terminable, on the part of either lessor or lessee. Only a
registered agreement may be used to lease movable property from year to year, for a period
longer than a year, or to reserve a yearly rent. Without a specific written agreement to the
contrary, the lease must last for the entire year of the day the time period in question began,
whether that time period is one year or several years. Where the time so restrained is
expressed to be terminable earlier than its expiration, and the rent omits to say at
whose choice it's so terminable, the lessee, and now no longer the lessor, shall have
such choice. None of the provisions of this Chapter apply to leases for agricultural purposes,
except into date because the Government may, by notification printed within the official
Gazette, declare all or any of such provisions to be therefore applicable in the case of all or
any of such leases, along with, or subject to, those of the native law, if any, for
the nowadays in force. If the lease giver transfers the property leased, or any half thereof, or
any a part of his interest therein, the transferee, within the absence of a contract to the

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contrary, shall possess all the rights, and, if the leaseholder thus elects, be subject to any or
all the liabilities of the lessor on the property or part transferred farewell as he's the owner of
it; however the lessor shall not, by reason solely of such transfer, stop to be subject to any of
the liabilities obligatory upon him by the lease, unless the lessee elects to treat the transferee
as the person susceptible to him. The lessor, the transferee and the lessee may
also decide what share of the top class or hire reserved through the hire is payable
in recognize of the component so transferred, and, in case they disagree, such willpower can
be made through any Court having jurisdiction to entertain a healthy for the ownership of
the belongings leased. A forfeiture beneath phase 111, clause (g), is waived with the aid of
using popularity of lease which has turn out to be due because the forfeiture, or with the aid
of using misery for such lease, or with the aid of using another act at the a part of the
lessor displaying an aim to deal with the hire as subsisting:  Provided that the lessor
is conscious that the forfeiture has been
incurred:  Provided additionally that, wherein lease is established after the organization of
a in shape to eject the lessee at the floor of forfeiture, such popularity isn't always a waiver. A
notice given under section 111, clause (h), is waived, with the express or implied consent of
the person to whom it is given, by any act on the part of the person giving it showing an
intention to treat the lease as subsisting.

Illustrations (a) A, the lessor, gives B, the lessee, notice to quit the property leased. The
notice expires. B tenders, and A accepts, rent which has become due in respect of the
property since the expiration of the notice. The notice is waived.

b) A, the lessor, gives B, the lessee, notice to quit the property leased. The notice expires, and
B remains in possession. A give to B as lessee a second notice to quit. The first notice is
waived.

Where a hire of immoveable belongings has decided with the aid of using forfeiture for non-

charge of lease, and the lessor sues to eject the lessee, if, on the listening to of the suit, the
lessee will pay or tenders to the lessor the lease in arrear, collectively with hobby thereon and
his complete prices of the suit, or offers such safety because the Court thinks enough for
making such charge inside fifteen days, the Court may, in lieu of creating a decree for
ejectment by skip an order relieving the lessee in opposition to the forfeiture; and thereupon
the lessee shall keep the belongings leased as though the forfeiture had now no
longer occurred.

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There is total 30 leasing industry in Bangladesh out of which one industry is owned by the
Government, fifteen are local, eleven are joint ventures with foreign participants and two are
housing finance companies.

CHAPTER TWO: LITERATURE REVIEW

Current lease accounting standards classify leases as either operational or finance

leases. Operational leases don't need recognition of lease assets or lease liabilities on the
balance sheet. Projected changes to lease accounting would require a leaseholder to
acknowledge assets and liabilities for many leases over twelve months and will improve the
standard and a likeness of economic news of the entity. The
proposed adjustments could doubtlessly have financial implications for each preparer
and customers of accounting reports, inclusive
of adjustments to economic ratios, evaluation of threat and presenting an audit of the
accounting reports. According to the brand-new provisions of the practice, there'll now not be
a unitary glide of sources diagnosed with the leased asset, that is transferred in its entirety
from the lessor to the lessee, totally comparing the incidence of the well-
known circumstance of ‘drastically all dangers and rewards’. On the contrary,
a slow component is brought which makes it viable to outline the
leasing pastime greater in phrases of entitlement to
apply a glide of capacity services, through distinctive feature of which
the troubles of excessive discretion relative to the identity process of the asset being leased
are, in component at least, limited. These are troubles with which maximum of the criticisms
addressed through the doctrine within side the final theoretical orientation diagnosed are
associated.

CHAPTER THREE: LEASING INDUSTRY IN BANGLADESH

3.1: Overview of Leasing Companies in Bangladesh

At a meeting of the shareholders of the Industrial Promotion and Development Company of
Bangladesh Limited (IPDC) convened in Washington, D.C., in November 1983, the idea of
founding an equipment leasing company in Bangladesh was first discussed. As one of the
IPDC's owners and a pioneer in the promotion of leasing operations in developing nations,
the International Finance Corporation (IFC) stepped forward to help PDC establish the

11
leasing employer in Bangladesh. It was determined that the Korea Development Leasing
Corporation (KDLC), of which IFC was a shareholder, was a technical partner in the
proposed business. Joint appraisal missions were quickly followed, and in 1984 the first
equipment leasing company, now known as Industrial Development Leasing Company of
Bangladesh Limited (IDLC), was established with the active support of the Government of
Bangladesh and the participation of local and foreign institutional shareholders.

The business opened for business in February 1986. In Bangladesh, IDLC is a leasing
industry pioneer. It is a joint undertaking public limited company that includes the
transnational cooperation of industrial banks, insurance companies, and foreign leasing
companies. In the previous 18 years of operation, IDLC has played a catalytic role in offering
the private sector additional sources of time period and capital asset financing. The main area
of focus for IDLC has been financial leasing with terms of three to five years, with a focus on
existing unit balancing, modernization, replacement, and expansion (BMRE). With its
innovative vision, IDLC not only established lease finance as a reliable and effective
financial service, but also paved the way for the establishment of ten more leasing businesses
across the nation.

Since its inception, the leasing industry's uprising has successfully raised public knowledge
of lease finance and made strides toward achieving its goal of promoting the growth of
profitable businesses. Today, the annual revenue from lease financing is BDT4.5 billion.

3.2: The functions of selected leasing companies

The following are the obligations that were allocated to lease businesses in this study:

Industrial Development Leasing Company Limited (IDLC):

Beginning in 1985 with just one lease product, IDLC Finance Limited has since expanded to
become the largest non-banking financial institution in the nation. IDLC offers solutions from
the corporate finance, small and medium-sized enterprise finance, consumer finance, and
capital market areas today. More than 1300 individuals work across 41 touch locations in 24
cities around the nation to serve these products to our prestigious clients. Investment banking,
such as issue management, underwriting, and corporate advice, as well as discretionary

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portfolio management and margin lending, are among the company's main business
operations. Small and medium enterprises (SME), consumers, corporations, and capital
markets are the company's four operating divisions. 

United Leasing Company Ltd (ULC)

With a single product in mind, United Leasing Company, now known as United Finance,
began its adventure in 1989. The Asian Development Bank, Commonwealth Corporation,
numerous national and international companies, as well as Duncan Brothers Limited, a well-
known and long-standing business that has been in Bangladesh for 150 years, joined forces to
create this organization. The business acquired a license from Bangladesh in 1955 to function
as a financial institution. United Leasing Co. Ltd. initially concentrated on offering leasing
facilities primarily to medium-sized customers, but over time, they broadened their products
to fulfill the financial demands of clients ranging from corporations to individuals, regardless
of size.

The mission of United Leasing Co. Ltd. is to continuously enhance products in order to
maintain a competitive edge by controlling costs and risks in order to guarantee stable
financial performance and a sufficient return on all investments.

3.3: Ratio Analyses of the Assigned Leasing Companies

In this section, several ratio analyses on liquidity, leverage, solvency, and profitability have
been used to assess the financial statements of the assigned leasing firms, United Leasing
Company Limited and Industrial Development Leasing Company Limited. From the
companies' financial statements, data was extracted for three fiscal years between 2015 and
2017.

1. Quick Ratio: This sort of liquidity ratio can be used to gauge a company's capacity to
fulfil current obligations. It’s calculated by dividing quick assets by the current liabilities.
The quick ratios of the investment banks are as follows:

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Year 2015 2016 2017

IDLC Finance 1.14 1.15 1.14

Ltd
United Leasing 1.22 1.19 1.16
Company Ltd

Quick Ratio
1.22

1.19

1.16
1.15
1.14 1.14

2015 2016 2017

IDLC United Company

We are aware that this ratio must be one unit of current assets to one unit of current liabilities.
With this benchmark in mind, it can be concluded that both the company's quick ratios are in
respectable condition. None of them has excess current assets that could result in increased
opportunity costs, nor do they lack anything that could put them in a liquidity problem. The
corporation should maintain this level until they are able to do so, according to the
suggestion.

2. Interval Measure: This liquidity ratio measures a company's ability to cover operating
expenses if no further cash is received. By dividing quick assets by average daily
operating expenses, it is determined. The investment banks mentioned the following
interval measurements.

Year 2015 2016 2017

IDLC Finance 17190 15265 15716

Ltd
United Leasing 15509 14099 14900
Company Ltd

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 Interval Measure
17190
15509 15265 15716
14901
14099

2015 2016 2017

IDLC United Company

According to the graph above, IDLC is in better position than ULC for so

many years, also it is in an increasing trend. Again, for the 3 years ULC’s ones is in

decreasing trend. Whatever both companies are doing good and also the interval measures
enough for both of them.

3. Operating Expense Ratio: In real estate, the operating expense ratio describes the
measurement of a property's operating costs in relation to its income. It is used to
compare the costs of similar properties and can be determined by dividing a property's
operating expense (minus depreciation) by its gross operating income.

Year 2015 2016 2017

IDLC Finance 35.2% 37.9% 40.7%

Ltd
United Leasing 42.0% 47.7% 52.5%
Company Ltd

The table reflects the percentage of operating expense against gross operating income. Lower
the percentage is better for the company. The table regarding this has been analysed below:

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 Operating Expense Ratio
52.50%
47.70%
42.00% 40.70%
37.90%
35.20%

2015 2016 2017

IDLC United Company

From 2015-2017, the Operating Expense Ratio of United Leasing Company Ltd has been
increasing. This means the operating expense is more in relation to its income. The ratio of
FDLC is also increasing in these 3 years but as compared to ULC, its operating costs are
comparatively lower. Hence, it is performing better than ULC. both of the companies is that
they should try to keep the percentage lower as much as possible by controlling the operating
expense and boosting the gross operating income level to expand the margin.

4. Return on Investment:  It represents the unit of currency earned for each unit of same
currency’s investment. Investors do this to compare their investment to other potential
investments that are out there. For the business and investors, a larger ratio is desirable. It
can be calculated by dividing EBIT by investment. Since interest depends on capital
structuring and the corporation has no influence over tax rates, EBIT is used.

Year 2015 2016 2017

IDLC Finance 44.9% 54.5% 49.2%

Ltd
United Leasing 42.2% 33.4% 21.7%
Company Ltd

Results of the table represents the return percentage against the amount of investment. The
result has been analysed below through graph:

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 Return on Investment
54.50%
49.20%
44.90%
42.20%

33.40%

21.70%

2015 2016 2017

IDLC United Company

The maximum return on investment is done by IDLC in 2016, which is 54.5%. The ROI of
ULC is in a decreasing trend. IPDC is having higher return on investment than ULC.
Suggestion for both companies will be to keep up the return percentage on a decent level so
that it does not affect the market value for the companies

5. Earnings per share: Earnings per share is another method for determining the
profitability of shareholders. It is the ratio of net profit to the number of outstanding
shares. It illustrates the earnings potential of businesses on a per-share basis. However, it
does not guarantee dividend payments; instead, it just represents earnings. Company
might retain the earnings in the future.

Year 2015 2016 2017

IDLC Finance 4.95 5.95 4.26

Ltd
United Leasing 0.21 1.76 1.44
Company Ltd

The EPS draws interest in the company from both current and potential shareholders.
Therefore, a high EPS would undoubtedly catch the attention of stakeholders and spur market
demand for that company. The analysis of this section is as follows:

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 Earnings per Share
5.95

4.95
4.26

1.76
1.44

0.21
2015 2016 2017

IDLC United Company

IDLC is having a higher EPS than ULC from 2015-2017. The EPS of ULC is in upward and
downward trend. According to the graph, it is seen that for IDLC, the minimum EPS was
4.26 and the maximum EPS was 5.95 for last three years. On the other side, in the year 2015
only, ULC offered a lower EPS than other years. Suggestion for the companies will be the
same just like that of investment banks that need to keep it a decent level to capture the
position in market strongly. For this, a good proportion of dividend distribution is needed to
ensure as well

6. Net Profit Margin: This illustrates how net profit and sales are related. It displays the
effectiveness in manufacturing, administering, and selling goods and services, which
reveals the firms' capacity to overcome challenging economic circumstances like
dropping commodity prices, decreased demand, unexpected price increases for raw
materials, etc.

2015 2016 2017

IDLC Finance 33.0% 58.2% 33%

Ltd
United Leasing 35.9% 48.0% 42.1%
Company Ltd

We know that the greater the percentage, better for the companies as it represents the ultimate
net profit for a company. The table has been analyzed as following:

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 Net Profit Margin
58%

48%
42%
36%
33% 33%

2015 2016 2017

IDLC United Company

The net profit margin for each company is represented on the graph. The net profit margin for
both companies is inconsistent. Every year, there is a significant increase and downward
fluctuation. Considering the data of both companies, the lowest Net profit margin is 33%. In
other words, things didn't get any lower than this. However, the declining pattern is the issue.
The suggestion is that both companies should concentrate on reducing operational expenses
and increasing revenue levels. As a result, the margin will be increased, and both parties
should work to keep the percentage stable as much as feasible.

7. Financial Expense Coverage: It is a ratio for measuring efficiency that shows how much
of a company's assets are spent for administrative and other operating costs. It is
computed by dividing operational costs by the average asset value of the fund. Operating
costs decrease the company's assets, which lowers the return to investors. By the way,
trading activities are not included in the ratio either.

Year 2015 2016 2017

IDLC Finance 1.47 1.56 1.54

Ltd
United Leasing 1.50 1.43 1.35
Company Ltd

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Through this ratio, the efficiency of a company is measured which represents a firm's assets
that how much they are being used for administrative and other operating expenses. The
analysis regarding this table is as following:

Financial Expense Coverage

1.56
1.54
1.5
1.47
1.43

1.35

2015 2016 2017

IDLC United Company

8. EBIT Margin Ratio: The EBIT margin ratio shows how earnings before interest and tax
(or EBIT margin) affect return on equity (ROE). This ratio assesses how a company's key
business activities impact its ROE. It determines how much EBIT an organization can
produce from total revenue. It is a metric of bank profitability that sheds light on a bank's
capacity for profit. EBIT margin expansion is mostly a result of revenue expansion and
effective cost management. EBIT margin decline is mostly caused by lower revenue and
increasing operating expenses. The following table shows the EBIT Margin Ratio.

Year 2015 2016 2017

IDLC Finance 0.65 0.62 0.60

Ltd
United Leasing 0.58 0.52 0.48
Company Ltd

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 EBIT Margin Ratio
0.65
0.62 0.6
0.58
0.52
0.48

2015 2016 2017

IDLC United Company

The EBIT Margin of IDLC is greater than ULC. But both company’s EBIT Margin is in a
decreasing trend.

9. Asset Turnover Ratio: Asset turnover ratio evaluates how effectively a business generates
revenue from its assets. The general rule is that a corporation performs better when the
ratio is higher. A lower asset turnover ratio suggests that management issues and
inefficient asset use are present in the organization. This provides insight into how a firm
is run and how its assets are used to create money for investors and creditors. The
following table shows the asset turnover ratio. Asset Turnover Ratio: Asset turnover ratio
evaluates how effectively a business generates revenue from its assets. The general rule is
that a corporation performs better when the ratio is higher. A lower asset turnover ratio
suggests that management issues and inefficient asset use are present in the organization.
This provides insight into how a firm is run and how its assets are used to create money
for investors and creditors. The following table shows the asset turnover ratio.

Year 2015 2016 2017

IDLC Finance 0.06 0.06 0.05

Ltd
United Leasing 0.05 0.05 0.04
Company Ltd

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 Asset Turnover Ratio
0.06 0.06

0.05 0.05 0.05

0.04

2015 2016 2017

IDLC United Company

Overall, the asset turnover ratio of IDLC is higher than ULC. Both the company has a lower
asset turnover ratio. That means management issues and inefficient asset use are present in
the organization.

CHAPTER FOUR: CONCLUSION

The entire paper has been discussed in accordance with the suggested guidelines. The author
attempted to offer a perspective on investment banks and leasing financing organizations,
including what their general goals are, general standards, and the various tasks that each of
these businesses does. This paper's main goal was to evaluate the financial standing of the
leasing companies, which was accomplished by considering multiple ratios to the financial
statements. Additionally, the essential advice had been given based on the market climate and
the circumstances of various organizations.

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CHAPTER 5:

References

[1] [Online]. Available: https://ideas.repec.org/a/taf/acceur/v11y2014i1p35-54.html.

[2] "Lease Accounting: Back into the Past—A General Review of Different".

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