•where owner (lessor) transfers right to use the asset to the user (lessee) •Without transferring ownership •for an agreed period of time (lease time) •in return for a rental (lease rental ) •Asset is reverted back unless there is provision of renewal
•Aircraft & railway companies in Japan , Canada, US,
Germany had shown 4 to 8 % NPV benefit when they took asset on lease instead buying/finance FINANCE LEASE OR CAPITAL LEASE • Lease where there is transferring a substantial part of Risks & Rewards ( Ex. Obsolescence )associated with ownership from lessor to lease • There is transfer of substantial part of risk & reward if : – Ownership is transferred at end of lease – Option to purchase at lower price than FMV on date of option – Lease term is for major part of life of assets – PV of minimum lease payments greater than or substantially equal to FMV on inception of lease • According to FASB (USA) if lease term exceeds 75 % of useful life or PV of lease payments exceeds 90 % of FMV on date of inception of lease FINANCE LEASE OR CAPITAL LEASE • Lessee is responsible for repair , maintenance & insurance of assets
• Lessee undertakes hell or high water obligation to
pay lease rental regardless of condition or suitability of asset
• Financial lease which operates over entire economic
life of an asset is called as FULL PAY OUT LEASE PRACTICAL PROBLEM
• A company has given an equipment costing
400 lacs on lease for 5 years on lease rental Rs
300/ 1000 PA. Incremental borrowing rate is
18 % . Is the lease a financial lease if
useful life is 6 or 10 years ?
SOLUTION A ) 5 / 6 = 83.3 % WHICH IS MORE THAN 75 % • HENCE IT IS FINACIAL LEASE
B ) 5 / 10 = 50 % WHICH IS LESS THAN 75 %
• BUT • 400 * 300 / 1000 = 120 • 120 * PVIFA ( 18,5) • 120 * 3.127 = 375.24 LACS • 375.24 / 400 = 94 % • WHICH IS GREATER THAN 90 % • HENCE IT IS FINACIAL LEASE OPERATING LEASE • IAS defines it as any lease other than Financial lease • Lease term significantly less than economic life of asset • Lessee enjoys right to terminate lease • Technological & business related risk are not shifted from lessor to lessee
• Wet lease - Lessor if provides operating know how , supplies