Leasing and Hire Purchase

Financial Accountancy

Unit: 4 Leasing and Hire Purchase

Leasing:

Is a kind of financial service which allows a firm to use and control asset without acquiring it.
Leasing helps small firms to acquire assets of higher value. It is the form of renting of assets.

The maximum period of lease according to law is for 99 years. Previously land or real resate,
mines and quarries were taken on lease.

A lease is a contract under which one party, the lessor (owner of the asset), gives another party
(the lessee) the exclusive right to use the asset usually for a specified time I return for the
payment of rent.

• The contract: There are essentially two parties to a contract of lease financing, namely
the owner and the user.
• Assets: The assets, property to be leased are the subject matter lease financing contract.
• Rental payments: The lessee pays to the lessor for the lease transaction is the lease
rental.
• Maintain: Provision for the payment of the costs of maintenance and repair, taxes,
insurance and other expenses appertaining to the asset leased.
• Term of lease: The term of the lease is the period for which the agreement of lease
remains in operation.
• Ownership: During the lease period, ownership of the assets is being kept with the lessor
and it use is allowed to the lessee.

Steps in Leasing:

• Lessee identifies the equipments and the supplies or lessor of the asset.
• Lessee enters into agreement with lessor
• Lessor delivers the asset to the lessee.

Advantages of Leasing:

1. Trading on tax shield: Incase of non-tax paying lessee, the cost of financing an asset is
much higher as compared to a tax paying lessee.
2. Absence of restrictive convenience: The financial institution while lending money usually
attach several restrictions on the borrowers as regards management, debt equity norms
declaration of dividends etc.

Bhagyashree S.
Asst. Prof Page 1
 Leasing and Hire Purchase
3. Leasing protects against obsolescence: Lease arrangements helps to protect the lessee
against the risk of obsolescence in respect of the assets which become obsolete at a faster
pace.
4. Leasing arrange faster and cheaper credit: Leasing companies are generally more
accommodating than banks and other financial institutes in respect of terms of financing.
5. Leasing permits alternatives uses: A leasing arrangement provides a firm with the use and
control over the assets without incurring huge capital expenditure and requiring to make
only periodical rental payments.

Disadvantages of leasing:

1. Deprived of the asset in case of default: In cas the lessee makes a default in rental
payment, the lessor is entitled to take over the asset and the lessee has no right to prevent
him from doing so.
2. Deprived on ownership: In a leasing arrangement, the lessee does not get the ownership
of asset.

Lessor: The party who is the owner of the equipment permitting the use of the same by the other
party on payment of a periodical amount.

Lessee: The party who acquires the right to use equipment for which he pays periodically.

Lease Rentals: This refers to the consideration received by the lessor in respect of a transaction.
– Interest on the lessor investment, charges borne by the lessor, depreciation and servicing
changes.

Types of leasing:

1. Financial Lease: This type of lease which is for a long period provides for use of asset
during the primary lease period which devotes almost the entire life of the asset. The
legal title is retained by the lessor who has no option to terminate the lease agreement.
The lessor thus is typically a financial institution and does not render specialized service
in connection with the asset.
2. Operating lease: It is where the asset is not wholly amortized during the non-cancellable
period, if any, of the lease and where the lessor does not rely for is profit on the rentals in
the non-cancellable period. The lessee use the asset for a specified time. The lessor bears
the risk of obsolescence and incidental risks.
3. Sale and Lease back leasing: To raise funds a company may sell an asset which belongs
to the lessor with whom the ownership vets from there on. The asset thus remains with
the lessee with the change in title to the lessor thus enabling the company to procure the
much needed finance.

Bhagyashree S.
Asst. Prof Page 2
 Leasing and Hire Purchase
4. Sales Aid lease: This arrangement the lessor agrees with the manufacturer to market his
product through his leasing operations, in return for which the manufacturer agrees to pay
him a commission.
5. Specialized service lease: In this type of agreement, the lessor provides specialized
personal services in addition to providing its use.
6. Small ticket and Big- ticket leases: The lease of assets in smaller value is generally
called as small ticket leases and larger value assets are called big ticket leases.
7. Cross border lease: The recent development in economic liberalization, the cross border
leasing is gaining greater importance in areas like aviation, shipping and other costly
assets which base likely to become absolute due to technological changes.
8. Leverage Lease: A leveraged lease or leased lender is a lease in which the lessor puts up
some of the money required to purchase the asset and borrows the rest from a lender. The
lender can repossess the asset in the event of a lessee payment default.

Leasing in India:

Leasing industry in India is of recent origin. It was pioneered in 1973 when for the first time
leasing company of India was set up in madras. In 1980 another leasing company knows as
20th century leasing came into existence. The leasing industry entered the third stage in the
growth phase in late 1982 when numerous financial institution and commercial bansk either
started leasing or announced plans to do so. The was also the time when the profit
performance of the first two dozen companies had been made public which was so
fascinating as to attract many more companies in leasing business.

***************

Bhagyashree S.
Asst. Prof Page 3