m A written agreement under which a property owner allows a tenant to use the property for a

specified period of time and rent.

m The lessee (person taking out a lease) agrees to pay a number of fixed or flexible installments
over an agreed period to the lessor, who remains the owner of the asset (item) throughout the
period of the lease.

m Athough generally fixed, the amount and timing ogf payment of lease rentals can be tailored
to the lessee¶s profits or cash flows.

m It can be up-fronted lease or back-ended lease.

m The lessor is entitled to claim depreciation on the leased asset.

m In long term lease the lessee is generally give the optionto buy or renew the lease.
m A contract lasts over a number of years, usually between 2 and 10, depending on the cost and
usable life of the product.
m Have the full use of a piece of equipment without having to pay the full cost of the item in
one go.
m ë




m  



1. Leveraged lease
2. Sale-and-lease back
3. Cross border lease
4. Closed and open ended lease
5. Direct lease
6. Master lease
7. Percentage lease
8. Net net net lease
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m Long-term, non-cancellable lease contracts are known as financial leases.

m The essential point - it contains a condition whereby the lessor agrees to transfer
the title for the asset at the end of the lease period at a nominal cost.

m At lease it must give an option to the lessee to purchase the asset he has used at
the expiry of the lease.

m High cost high tech equip.

m The lease agreement is irrevocable.

m All the risks incidental to the asset ownership are transferred to the lessee who
bears
º the cost of maintenance,

º insurance and repairs.

m ënly title deeds remain with the lessor.

m Contrast to the financial lease
m A lease agreement gives to the lessee only a limited right
to use the asset.
m The lessor is responsible for the upkeep and maintenance
of the asset.
m The lessee is not given any uplift to purchase the asset at
the end of the lease period.
m Sub-part of finance lease
m The owner of an asset sells the asset to a party (the buyer), who in turn
leases back the same asset to the owner in consideration of lease rentals.
m Under this arrangement, the assets are not physically exchanged but it
all happens in records only.
m Sale and lease back transaction is suitable for those assets, which are
not subjected depreciation but appreciation, like land.

m The seller assumes the role of a lessee and the buyer assumes the role of
a lessor.

m The seller gets the agreed selling price and the buyer gets the lease rentals.
m A third party is involved beside lessor and lessee.
m The lessor borrows a part of the purchase cost (say 80 %)
of the asset from the third party i.e., lender
m The asset so purchased is held as security against the
loan.
m The lender is paid off from the lease rentals directly by the
lessee and the surplus after meeting the claims of the
lender goes to the lessor.
m Under direct leasing, a firm acquires the right to
use an asset from the manufacturer directly.

m The ownership of the asset leased out remains

with the manufacturer itself.
º No large outlay - The cost is spread over a number of years; there is no need to pay the
entire amount upfront.

º Security - The product is still owned by the leasing company, meaning that they have
better security on finance.

º Flexibility and convenience - The lease agreement can be tailor- made in respect of
lease period and lease rentals according to the convenience and requirements of all
lessees

º Tax advantages

º Budgeting - A fixed contract, it is relatively easy to budget and forecast with

º Saving of capital

º Improvement in liquidity
þ No ëwnership
þ Costly option - high interest rates, costlier than straight
buying
þ Long Term Expense
þ Maintenance
þ No working capital
m A document under which a landlord and tenant set forth the
rights and obligations of each party with respect to an
apartment, rental unit, or other real property owned by the
landlord and used by the tenant.

m An instrument conveying the possession of real property for a

fixed period in consideration of the payment of rent.
 Nature of the lease
 Description
 Delivery and redelivery
 Period
 Lease rentals
 Use
 Title
 Repairs and maintenance
 Alteration
0
 
º Requirements

º Proof for indebtedness

º Evidence availability and enforceability of security

º Focus on the terms of lease

º In case of default :company can take appropriate action

þ 

  

1. Deliver the asset to the lessee
2. Authorize the lessee to use the asset
3. Leave the asset in peaceful possession

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1. Pay the lease rentals
2. Protect the lessors title
3. Take reasonable care of the asset
4. Return the leased asset
 
- Is capitalized in the book of lesser

- Lease payments are treated as income of the lessor and expense of the lessee

- Depreciation of the assets should on the basis of normal depreciation policy of the lessor
for similar assets

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- Must be capitalized in the books of lessee

- At the time of inception leased asset is shown as an asset of B/S of the lessee

- Its VALUE = PV of the committed lease rentals

- Payments are financial charges (expense in P/L) and principal amount (deducted
fromlease payable in B/S)

- Leased asset is depreciated in the books of lessee.