Sunday, September 6, 2020

LEASE FINANCING

 


  • LEASE FINANCING
  • FINANCIAL SERVICES AND MARKETS
  • DR. SHASHI AGGARWAL ( queriesmanagemment@gmail.com)
  • MEANING OF LEASING
  1. LEASE IS A CONTRACT WHERE BY THE OWNERS OF AN ASSETS (LESSOR) GRANTS TO ANOTHER PARTY             ( LESSEE) THE EXCLUSIVE RIGHT TO USE THE ASSETS USUALLY FOR  AN AGREED PERIOD OF TIME IN RETURN FOR THE PAYMENT OF RENT.
  2. LEASING AS A FINANCING CONCEPT IS ARRANGEMENT BETWEEN TWO PARTIES THE LEASING COMPANY OR LESSOR AND THE USER OR LESSEE
  3. THE LESSEES USES THE CAPITAL ASSETS OF THE LESSOR ON AGREED AMOUNT OF RENT 
  4. LESSOR AND LESSEE 

  • DEFINITION
  • THE INTERNATIONAL ACCOUNTING STANDARDS COMMITTEE ,” AS AN AGREEMENT WHERE BY THE LESSOR CONVEYS TO THE LESSEE IN RETURN FOR RENT,THE RIGHT TO USE AN ASSET FOR A AGREED PERIOD OF TIME.”
  • LEASING AS A CONTRACT BETWEEN A LESSOR AND A LESSEE FOR THE HIRE OF A SPECIFIC ASSET SELECTED FROM A MANUFACTURER OR VENDOR OF SUCH ASSET BY THE LESSEE. THE LESSEE CAN HAVE POSSESSION AND USE OF THE ASSET ON THE PAYMENT OF SPECIFIC RENTAL OVER A PERIOD.
  • TERMS
  • THE OWNER OF THE ASSET IS LESSOR
  • ONE WHO PAYS THE RENTAL AND USES THE ASSET IS LESSEE
  • THE ASSET COULD ANY PRODUCT : MACHINERY OR SERVICE
  • PARTIES TO THE LEASE AGREEMENT MAY BE INDIVIDUALS,PARTNERSHIP FIRMS,CORPORATE BODIES AND FINANCIAL INSTITUTIONS
  • NEED

  1. MODERNIZATION
  2. BALANCING EQUIPMENT
  3. CARS, SCOOTERS AND OTHER VEHICLES
  4. NOT FINANCED BY BANKS/INSTITUTIONS

 

  • ELEMENTS
  1. CONTRACT UNDER WHICH THE OWNER OF AN ASSET ALLOWS ANOTHER PERSON OR PARTY TO USE THE ASSET
  2. IN RETURN OF SOME RENT
  3. THE OWNER OF THE ASSET IS CALLED LESSOR
  4. THE PERSON WHO USES THE ASSET AND PAYS RENT IS CALLED LESSEE
  5. PARTIES INDIVIDUAL/PARTNERSHIP FIRMS/COMPANIES/FINANCIAL INSTITUTIONS
  6. LEASE IS NOT A SALE
  7. ASSET IS MOVABLE WHICH MEANS THAT IT CAN BE RELOCATED
  8. THE ECONOMIC LIFE OF THE ASSET SHOULD NOT BE LESS THAN PERIOD OF LEASE
  • THE LEASING PROCESS
  1. LEASE SELECTION:-TYPE OF THE ASSET,FACTORS: LEASE PAYMENT,REPUTATION OF A LESSOR,TERMS OF GUARANTEE,WARRANTIES AND OTHER SERVICES
  2. LESSOR’S APPRAISAL
    1. STUDY A NUMBER OF COMMERCIAL DOCUMENTS
    2. ATTENDANT'S LEASE DOCUMENT
    3. PURCHASE ORDER,INVOICE,BILL,DELIVERY NOTE
    4. MOA,COPIES OF BOARD RESOLUTION AND OTHER RELEVANT TO ASSESS THE FINANCIAL POSITION
  3. ACCEPTANCE OF THE OFFER
  4. AGREEMENT: A DEAL BETWEEN A LESSOR AND LESSEE IS FORMALIZED IN THE FORM OF A LEASE AGREEMENT CONTAINS THE DETAILS OF THE LEASE TRANSACTION AND SPECIFIES THE LEGAL RIGHT AND OBLIGATION,
  5. PERIOD OF LEASE
  6. LEASE RENTALS
  7. COST OF MAINTENANCE
  • CLAUSES OF LEASE AGREEMENT
  1. NATURE OF THE LEASE
  2. PERIOD OF LEASE
  3. LEASE RENTALS
  4. COST OF MAINTAINING AND OPERATIONS OF THE EQUIPMENT
  5. LESSEE’S WARRANTIES
  6. LESSEE'S COVENANT
  7. INDEMNIFIES OF THE LESSEE
  8. LIABILITY OF THE LESSOR
  9. DEFAULT CLAUSE
  • ADVANTAGES OF THE LEASING
  • TO THE LESSEE
  1. LESS FINANCE
  2. CASH FLOW BENEFITS
  3. OFF-BALANCE SHEET FINANCING
  4. PROMOTER’S CONTROL
  5. ADVANTAGE OF RESTRICTIVE CONDITIONALITY
  6. FAST AND FLEXIBLE FINANCING
  7. HEDGE AGAINST INFLATION
  • TO THE LESSOR
  1. SAFE FINANCING
  2. BETTER PROFITABILITY
  3. BENEFICIAL FOR TAX TREATMENT
  4. FINANCIAL LEVERAGE
  5. RESIST THE LOW PHASE OF BUSINESS CYCLE
  • DISADVANTAGE OF LEASING
  1. COSTLY PREMATURE TERMINATION
  2. CAN BE USED ACCORDING TO LEASE AGREEMENT
  3. LESSEE IS NOT THE OWNER
  4. NOT ENTITLED TO THE PROTECTION OF EXPRESS OR IMPLIED WARRANTIES
  5. NO RIGHT ON THE RESIDUAL VALUE

 

  • LEASING INDUSTRY ( SUPPLIER)
  • PRIVATE SECTOR LESSORS
  1. SPECIALIZED LEASING COMPANIES:-THE FIRST LEASING CO OF INDIA LTD,THE TWENTITH CENTURY FINANCE CORPORATION LTD AND GROVER LEASING LTD
  2. LEASING AND HIRE PURCHASE FINANCE COMPANIES
  3. SUBSIDARIES OF MANUFACTURING GROUP OF COMPANIES: BAJAJ AUTO FIANCE OF BAJAJ AUTO LTD
  4. LEASING INDUSTRY ( SUPPLIER)
  5. PRIVATE SECTOR LESSORS
  6. THE CAPTIVE LEASING FINANCE COMPANIES
  7. VENDOR LEASING
  8. PUBLIC SECTOR
  9. BANKS AND SUBSIDARIES OF THE BANKS
  • LESSEE
  1. PUBLIC SECTOR UNDERTAKINGS
  2. GOVT DEPARTMENTS
  3. PRIVATE SECTOR COMPANIES
  4. INDIVIDUALS
  • TYPE OF LEASING
  1. FINANCE LEASE
  2. OPERATING LEASE
  • TYPES OF FINANCE LEASE:-
  1. LEVERAGED LEASE
  2. SALE AND LEASEBACK
  3. DIRECT LEASE
  4. DOMESTIC LEASE
  5. INTERNATIONAL LEASE

 

  • FINANCE LEASE
  1. METHOD OF EQUIPMENT FINANCING
  2. NON CANCELLABLE LEASE CONTRACT FOR A LONG TERM/MEDIUM TERM
  3. A LESSOR KEEPS THE TITLE TO THE EQUIPMENT THROUGHOUT THE TENURE
  4. LOSS ON ACCOUNT OF OUTDATED OF THE EQUIPMENT IS WITH THE LESSEE AND THE LESSEE IS RESPONSIBLE FOR THE REPAIR,MAINTENANCE AND INSURANCE OF THE EQUIPMENT
  5. A LESSEE MAY PURCHASE OR RETURN THE ASSET TO LESSOR IN THE END
  6. HAS THE EXCLUSIVE RIGHT TO USE THE ASSET
  7. LEASE RENTAL COVERS THE ASSET COST,COST OF FINANCING,OVERHEAD PLUS A RATE OF THE RETURN FOR A LESSOR
  8. THE LEASING COMPANY ALSO CHARGES NOMINAL SERVICE CHARGES TO COVER LEGAL AND OTHER COSTS
  9. THE LEASING COMPANY MAY ALSO DEMAND COLLATERAL OR BANK GUARANTEE IN INDIVIDUAL CASES
  10. THE HIGH COST OF EQUIPMENT SUCH AS OFFICE EQUIPMENT,DIESEL GENERATORS.MACHINES TOOLS,LOCOMOTIVES ETC
  • OPERATING LEASE
  1. A SIMPLE AGREEMENT BETWEEN THE OWNER OF THE EQUIPMENT AND THE USER WHICH PROVIDES FOR THE EXCLUSIVE USE OF THE EQUIPMENT FOR THE MONTHLY FEE.
  2. ARRANGEMENT TO RENT THE EQUIPMENT TO BE USED FOR A FIXED PERIOD.
  3. ANY LEASE OTHER THAN A FINANCIAL LEASE IS AN OPERATING LEASE
  4. SHORT PERIOD
  5. HIRING OF COMPUTERS WITH OPERATORS AND HIRING OF TAXI
  6. A LESSOR IS RESPONSIBLE FOR THE REPAIRS AND MAINTENANCE,OPERATIONAL,CREW AND INSURANCE
  • EXAMPLE OF OPERATING LEASE


  • ADVANTAGE OF THE OPERATING LEASE
  1. IMPROVES THE PROFITABILITY OF THE BUSINESS
  2. ENABLES THE LESSEE TO DIVERSIFY THE BUSINESS
  3. HEDGE AGAINST EQUIPMENT OBSOLESCENCE
  4. A LESSOR IS GENERALLY RESPONSIBLE FOR INSURANCE,MAINTENANCE
  5. EQUIPMENT DEPLOYMENT IS BASED AS PER THE USER’S NEEDS EITHER SHORT OR MEDIUM
  • FINANCIAL LEASE VS OPERATING LEASE

  • DIFFERENCE BETWEEN OPERATING AND FINANCIAL LEASE
  • OPERATING LEASE
  1. IS RENTAL AGREEMENT. THE LESSEE IS NOT COMMITTED FOR PAYING MORE THAN ORIGINAL COST
  2. FOR MAINTENANCE EXPENSES AND TAXES BY THE LESSOR
  3. LEASING COMPANY ASSUMES THE RISK OF OUTDATEDNESS
  4. MAY BE CANCELLED

5.     CONTRACT PERIOD RANGES FROM INTERMEDIATE TO SHORT RUN

6.     COMPUTERS,OFFICE EQUIPMENT,AUTOMOBILES,TRUCKS ARE LEASED

7.     FINANCIAL COMMITMENT : REGULAR RENT PAYMENT AND SHOWN IN THE PROFIT AND LOSS ACCOUNT

8.     THE LESSOR FULFILLS THE SERVICE FUNCTION

 

  • FINANCIAL LEASE

1.     IS LIKE AN INSTALLMENT LOAN. LEGAL COMMITMENT TO PAY FOR  THE ENTIRE COST PLUS INTEREST

2.     MAINTENANCE AND TAXES PAID BY THE LESSEE

3.     RISK OF OUTDATEDNESS IS BORNE BY THE LESSEE

4.     NON CANCELLABLE

5.     RANGE FROM MEDIUM TO LONG TERM

6.     AIRCRAFT,LAND ,BUILDING,HEAVY MACHINERY ARE LEASES

7.     INVOLVES A FINANCIAL COMMITMENT SIMILAR TO LOAN BY A LEASING COMPANY. IT PLACES THE LESSEE IN A POSITION OF BORROW

8.     FULFILLS THE FINANCE FUNCTION

  • LEVERAGED LEASE
  • A LEASING COMPANY GENERALLY PURCHASE THE ASSETS BY PROVIDING 20 TO 40% OF THE COST OF THE EQUIPMENT. REMAINING AMOUNT IS BORROWED FROM THE FINANCIAL INSTITUTIONS. FINANCE FOR THE LEASED EQUIPMENT IS PARTLY BY DEBT AND PARTLY BY EQUITY.
  • THE LESSOR SERVICES THE DEBT OUT OF RECEIVED LEASE RENT
  • LEVERAGED LEASE
  • EXAMPLE


  • SALE AND LEASEBACK
  • A COMPANY SELLS AN ASSET TO ANOTHER PARTY WHO IN TURN LEASE IT BACK TO THE COMPANY.


  • DIRECT LEASE
  • DIRECT LEASE CAN BE DEFINED A ANY LEASE TRANSACTION WHICH IS NOT SALE AND LEASED BACK. DIRECT LEASE MAY BE ARRANGED BY SUPPLIER/MANUFACTURE DIRECTLY OR THROUGH LEASING COMPANY
  1. BIPARTITE LEASE:- EQUIPMENT SUPPLIER CUM LESSOR AND THE LESSEE
  2. A TRIPARTITE LEASE:- AN EQUIPMENT SUPPLIER,A LESSOR AND LESSEE
  • TYPES OF LEASE
  • DOMESTIC LEASE: ALL THE PARTIES EQUIPMENT SUPPLIER,LESSEE,LESSOR DOMICILED IN THE SAME COUNTRY
  • INTERNATIONAL LEASE:  DOMICILED IN DIFFERENT COUNTRIES
  • ACCOUNTING TREATMENT
  • IN THE BOOKS OF THE LESSEE
  • STARTING LEASE IS AN ASSET AND LIABILITY
  • LEASE PAYMENT SHOULD BE APPORTIONED BETWEEN THE FINANCE CHARGES AND THE OUTSTANDING LIABILITY
  • UNDER OPERATING LEASE
  • AS AN EXPENSE
  • IN THE BOOKS OF THE LESSOR
  1. ASSET SIDE NET INVESTMENT IN THE LEASE
  2. LEASE RENTAL IN PROFIT AND LOSS ACCOUNT
  3. DEPRECIATION

 LINK FOR TOPIC FACTORING :https://www.gargshashi.com/2020/09/FACTORING.html

 

Posted by at
Labels:

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)