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LEASING & HIRE PURCHASE FINANCING

LEASING & HIRE PURCHASE FINANCING

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Meaning and concept of leasing Leasing Definition, Features & Modus Operandi Hire Purchase Definition, Features & Modus Operandi Types Types of Lease types of lease, documentation and legal aspects operating lease services lease financial lease Other types: Leveraged leases Full payout and non payment lease Sale and leaseback cross border leases Types of Hire Purchase Consumer Installment Credit Industrial and Commercial Credit

Leasing Vs Hire Purchase Distinction Advantages & Disadvantages Lease Evaluation Lessees View Lessors Perspective Techniques of Financing and Appraisal Appraisal of Limit for Bank Lending Computation of lending / Drawing Limit Supervision and Follow -up Accounting Aspects Accounting for Leasing Accounting for Hire Purchase Legal Aspects Income Tax Sales Tax Aspects Motor Vehicles Act Copyright 2008, Dr Sudhindra Bhat
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_ 2 N D ____ MEANING AND CONCEPT OF LEASING_____ Lease is defined by the international accounting standard as an agreement ___right to use whereby the lessor conveys to the lessee in return for rent the an agreed period of time. _____ According to jack broyles, lease is the method of acquiring the right to use ____ equipment of real property for consideration.
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Dr. Bhatt

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_ 2 N D ____ _____ A lease is classified as a financial lease if it secures for the lessor the ___ recovery of his capital outlay plus a return on the funds invested during the lease term. _____ A lease is an operating lease, according to the said guidance note of ICAI, if it does not secure for the lessor the recovery of his capital outlay ____ plus a return on the funds invested during the lease term.
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Dr. Bhatt

Excel Books

_ 2 N D ____ _____ ___ Acquisition of new plants and equipments are often required by business organizations. While it is necessary to see the profitability in investing on new equipment, one must equally be aware of the _____ conserve necessary to cash resources to maintain liquidity, under such circumstance leasing arrangements may come in handy for various reasons. ____
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_ 2 N D ____ _____ ___ OPERATING LEASE: In operating lease, the lease is usually for a shorter_____generally term and is cancelable. As the asset is leasable repeatedly to several person, the operating lease is usually said to be a nonpayout lease. ____ SERVICE LEASE :
LEASING & HIRE PURCHASE FINANCING

It is an equipment leasing under which the lessor provides financing as well as servicing of the assets during the lease period. The lessor will covenant with the lessee to provide maintenance and servicing of the leased asset during the existence of the lease. FINANCIAL LEASE: Financial lease is a long term lease usually coinciding with the economic life of the asset and is noncancellable. It operates as a long term debt financing and is usually full-payout as, in contrast to operating lease, it is usually a single lease repaying the cost of the asset. They play a major role in financing of building of buildings and equipments to industries.
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_ 2 N D ____ _____ COMPARE FINANCIAL AND OPERATING LEASE ___ _____ ____
LEASING & HIRE PURCHASE FINANCING FINANCIAL LEASE The risks and rewards incidental to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset. Therefore, the lessee bears the risk of obsolescence. He is responsible for maintenance, insurance, taxes, etc. It is an intermediate to long term lease essentially covering the expected useful life of the asset. During the primary lease period, usually the initial 3 or 5 or 8 years, the lease cannot be cancelled. The lessors' capital outlay is fully amortized during the primary lease period. During a single lease, the lessor recovers through the lease rentals his investment on the leased asset along with interest and profit. Hence, it is called full-pay-out lease. A financial lease is basically a debt equivalent i.e.. it is a form of borrowing in disguise. Since, it is a financing decision, the lessee has to decide whether to lease or borrow and buy the asset.

OPERATING LEASE

The leased asset is use-specific. Usually the lessor buys the asset identified by The leased asset is of common-use activity. The lessor already owns the the lessee and leases out to him. asset and leases it out to several users successively. The lessee is given the use of the asset for certain period. Ownership and benefits and risks associated with it remain with the lessor. Therefore, the lessor bears the risk of obsolescence. He is responsible for maintenance, insurance, tax, etc. It is a short term lease the lease period being significantly less than the useful life of the asset. The lease is usually cancelable at short notice. The lessors' capital outlay is not fully amortized during the period of a single lease. The lease rentals recovered during a lease-period are not sufficient to cover fully the cost of leased asset along with an acceptable return thereon. Hence, it is called a non-payout lease. An operating lease is basically a rental agreement. Since it is an investment decision, the lessee has to decide whether to lease or buy the asset.

The lessor takes the role of a financier. Usually, the lessor is a financial institution and cannot render specialized service connection with the asset.
This type of lease is generally suitable for equipment which is tailor made and does not have ready resale or release market eg. heavy machines, etc

The lessor is specialized in handling and operating the particular asset and usually provides in specialized services.
This type of lease is suitable for equipment which has longer economic life and ready resale or re-lease market i.e., automobiles, computers, office equipments.
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1. 2. 3. 4. LEVERAGED LEASES FULL PAYOUT AND NON PAYMENT LEASE SALE AND LEASEBACK CROSS BORDER LEASE

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_ 2 N D ____ _____ ___ Definition: As per Sec 2(c) of The Hire Purchase Act, 1972, a hire purchase is an agreement under which goods are let on hire and under which the hirer has _____ an option to purchase them. ____
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Hire Purchase Features

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_ 2 N D ____ _____ Based on whether the underlying assets are consumer goods or producer ___ goods, hire purchase, as a type of installment credit, are of two varieties: Consumer installment credit and _____ Industrial and Commercial credit. ____
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_ 2 N D ____ DIFFERENCE BETWEEN LEASE & HIRE _____ PURCHASE ___ _____ ____
LEASING & HIRE PURCHASE FINANCING

LEASE

HIRE PURCHASE

1. Financing company is called the lessor and the user of the 1. Financing company is called the hiree (hire vendor) or leased asset is called the lessee. owner and the user of the asset is called hirer. 2. During the entire period of operation of the contract, the 2. During the period of operation of the contract, the ownership of the asset remains with the lessor. The lessee ownership of the asset, for all practical purposes vests with has only the right to the exclusive use of the asset. After the hirer. After completion of the contract period and completion of the contract the possession of the asset is subject to payment of total amount of installments, the passed to the lessor and the same can be leased out to ownership legally passes on to the hirer. some other lessee at the option of the lessor. 3. Since the ownership of the asset is legally vested with the 3. As the hiree transfers all the risks and rewards of lessor, the same appears as fixed asset in his balance ownership the asset appears either as stock in trade or as sheet. receivables in the balance sheet of the hirer (user). The amount shown in the balance sheet is the total of installments paid by him less the interest component. 4. Depreciation can also be claimed by the lessor for computation of his taxable income. Lease rentals are 100% tax deductible. 4. 5. Depreciation can also be claimed by the hirer for computation of his taxable income. Hire purchase instalments are partly treated as capital repayment and the balance as interest expenses - the latter amount is only tax deductible.
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Disguised Debt-financing
Sale Tax Burden Psychological Dissatisfaction Higher Cost

Loss of Subsidy/Attraction

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