Leasing

In: Business and Management

Submitted By Mynk
Words 2584
Pages 11
Lease Finance

Lease Finance
• Lease is contract between the owner of the asset
(Lessor) and the user (Lessee) of the asset, wherein the
Lessor gives the right to use the asset to the Lessee for a consideration (Lease Rentals) over an agreed period of time (Lease period or tenure).
• At the end of the lease period, the leased asset reverts back to the Lessor, unless the lease is renewed for another term.
• Leasing separates the ‘Ownership’ and ‘Usage’ of the asset as two separate economic activities.
Leasing

2

Leasing, Hire Purchase, Instalment Sale
• Leasing:
– Lessor retains the Ownership of the asset & claims the benefit of Depreciation.
– Lessee claims the Lease Rentals as tax-deductible expense. • Hire Purchase:
– Ownership passes to the Hirer (user) on payment of the last Instalment (on payment of Capital & Interest) and takes benefit of Depreciation and tax-deductibility of the
Interest component of the Hire charges.
• Instalment Sale:
– The legal ownership passes as soon as the 1st instalment is paid. The balance amount is treated as a secured loan and Interest portion is Tax-deductible
Leasing

3

Basic Types of Lease
• On the basis of the extent to which the risks and rewards incidental to the ownership of the leased

assets lie with the Lessor or the Lessee, lease can be classified as:
 Finance Lease
 Operating Lease

Leasing

4

Finance (or Capital) Lease
• Non-cancellable for a specified period called the
PRIMARY LEASE Period- usually 5-8 years.
• Leased Asset is fully amortised over the Primary Lease period subsequently the Lessor Charges nominal lease rentals • Lessee is responsible for insurance & maintenance.
• Risk of Obsolescence is shifted from the Lessor to the
Lessee.
• E.g.: Leasing of Plant & Machinery
Financial lease transfers a major portion of the risks assigned with ownership to the Lessee.
Leasing

5

Operating Lease
• Short-term…...

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