Types and Advantages of Leasing

Pages: 27 (8757 words) Published: January 14, 2011
IAS 17 defines lease as an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. SAS 5 define lease as a contractual agreement between an owner ( the lessor) and another party ( the lessee) which conveys to the lessee, the right to use the leased asset for an agreed period of time in return for a consideration, usually periodic payment called rent. A lease contract conveys a right to a lessee to use the leased property, in the language of the conceptual frameworks, the lessee controls the future economic benefits embodied in the leased property for the period of the lease term. Similarly, the lease contract establishes an obligation on the lessee to sacrifice future economic benefits to an external party in payment for the use of leased property.

1.Cash Flow Management; - if cash is used to purchase assets, such cash will not be available for the normal operating activities of a company. Therefore, leasing help the company to manage its cash outflow and cash inflow.

2.Conservation Of Capital;-lines of credit may be kept open and may be used for purposes where finance might not be available easily

3.Continuity;- the lease agreement is itself a lien of credit that cannot easily be withdrawn or terminated due to external factors, unlike an overdraft that can be called in by the lender

4.Flexibility of the Asset Base;-the asset base can be more easily expanded and contracted. In addition, the lease payments can be structured to match the income pattern of the lessee

5.Off Balance Sheet Financing;- leasing provides the lessee with the possibility of off balance sheet financing, whereby a company has the use of an economic resource that does not appear in the balance sheet, with the corresponding omission of the liability.

In both IAS 17 and SAS 11, there are two types of lease, VIZ; finance and operating. (A)Finance Lease; - a lease that transfer substantially all the risk and reward of ownership of an asset. Title may not eventually be transferred. Usually, the agreement is non-cancelable and the lessee has the option to buy the property for a nominal amount upon the expiration of the lease. (B)Operating lease: - a lease other than a finance lease.

On the other hands, operating lease is the one in which the lessor, while giving the lessee rigth to the use of the leased property, retains practically all the risks, obligations and reward of ownership. Other Variants of Finance or Capital Lease are:

(A)Leveraged Lease is a three-party lease involving a lender (often a financial institution) in addition to the usual lessor and lessee. The lender supplies, in most cases, the greater part of the purchase price of the leased asset. (B)Sales- types lease is one where the dealer (the lessor ) transfer substantially all the ownership risks and benefits of the property to the lessee and, at the inception of the lease, the fair value of the leased property is greater or less, than its carrying amount in the books of the lessor resulting in a profit or loss to the lessor (who is often not a manufacturer is dealer) (C)Direct finance lease is one which transfers substantially all the ownership risks and benefits of the property to be lessee and at the inception of the lease, the value of leased asset is the same as its carrying amount to the lessor (often not a manufacture or dealer) (D)Sales and leaseback is one in which the seller of the property leases it back from the buyer. CLASSIFICATION OF LEASES

The crucial decision in accounting for lease is whether a transaction represents finance or an operating lease. IAS 17 provides a list of the factors that need to be considered in the decision whether risks and reward of ownership have passed to the lessee. These factors are considered individually and in...
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