Professional Documents
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GROUP 9
DEFINITION
Lease
Back-ended lease - Leasor is entitled to claim depreciation on the leased asset at the end of the lease contract.
Lease contract is divided into two parts -Primary lease Provides for the recovery of the cost of the asset and profit through lease rental. -Secondary lease Follows nominal lease rental.
TYPES OF LEASES
Operating Lease Short-term, cancellable lease agreements.
Financial Lease
Long-term, non-cancellable lease contracts. Financial leases amortise the cost of the asset over the term of lease, therefore called as capital or full-payment or direct leases. The lessee is normally responsible for maintenance and
insurance.
The lessee also bears the risk of obsolescence.
DIFFERENCE
Term
FINANCIAL LEASE
Long term
OPERATING LEASE
Short term
Cancelability
Non-Cancelable
Cancelable
Lease period
Substantially transfers
Maintenance, Insurance & Payable by lessee Taxes Asset Selection Selected by lessee
Selected by lessor
Lease Capitalization
Sale-and-lease-back
Special financial lease arrangement. A user may sell an(existing)asset owned by him to the
Cross-border lease
Lessor and lessee are situated in two different
countries.
Involves relationships and tax implications more
countries.
Other terms used by the leasing industry Closed and open ended lease Direct lease Master lease Percentage lease Wet and dry lease Net net net lease Update lease
ADVANTAGES OF LEASING
Convenience and flexibility Shifting of risk of obsolescence Maintenance and specialised services
Lease Financing
1.
2.
3.
Depreciation: Hire is entitled to claim depreciation tax shield. Hire purchase payments: It includes interest and repayment of principle. Hirer gets tax benefits only on the interest. Salvage value: Once the hirer has paid all installments, he becomes the owner of the asset and can claim salvage value.
2.
3.
Lessee is not entitled to claim depreciation tax shield. Lease payments: Lessee can charge the entire lease payments for tax purposes. Thus, he saves tax on the lease payment. Lessee does not become owner of the asset. Therefore, he has no claim over the assets salvage value.
Sundaram Finance Cholamandalam Finance Mahindra & Mahindra GE Capital Shriram Finance TATA Finance Citicorp
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