LEASES

A lease is a form of financing under which the owner of an asset (the lessor) temporarily transfers the right to use, and sometimes other ownership rights and obligations, of an asset to another party (the lessee).

Leasing became a common financing tool after 1973 in India.

Lease financing denotes procurement of assets through lease. Leasing industry plays an important role in the economic development of a country by providing money incentives to lessee.

BENEFITS OF LEASING - LESSEE

It provides an alternative to ownership. The party that leases also benefits from not having its resources invested in asset. Higher productivity and profits are derived from productive use of asset, rather than its ownership. Leasing provides an important financing alternative. Lessees also benefit from a number of tax advantages.

Types of leases

This type of lease have economic characteristics of asset ownership

The owner of an Allows only asset sells the asset use of an to a party who in turn asset, doesnt leases back the convey same asset to the ownership owner in consideration of lease rentals.

Purchased of an asset being leased is financed by a third party

A firm acquires the right to use an asset from the manufacturer directly.

CAPITAL LEASE Vs OPERATING LEASE

EFFECT ON FINANCIAL STATEMENTS

Income Statement for XYZ Ltd. Sales COGS Gross Profit Salaries Depreciation on Leased Asset Interest Expense on Lease Insurance Water & Electricity Tax expense Net Income 100000 60000 40000 12000 5000 2000 1000 3000 3000 26000 Sales COGS Gross Profit Salaries Stationary Advertising Insurance Water & Electricity Tax expense Net Income Income Statement for PQR Ltd. 100000 60000 40000 12000 2500 1000 1000 3000 3000 29500

Income Statement for ABC Ltd. Sales COGS Gross Profit Salaries Interest Expense on Lease Advertising Insurance Water & Electricity Tax expense Net Income 100000 60000 40000 12000 3500 1000 1000 3000 3000 28500

Lessee must depreciate the leased asset and report the expense on the income statement. Also records periodic interest expense as it's owed over the lease term and reports it in the income statement, in case of capital lease. Lessee records rent paid on an operating lease in the income statement as a reduction of sales.

Advantages of leasing
SAVING OF CAPITAL

Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin money as there is no down payment. In this way the saving in capital or financial resources can be used for other productive purposes e.g. purchase of inventories.
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.
PLANNING CASH FLOWS

Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets.
IMPROVEMENT IN LIQUIDITY

Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique.