L.15.IBFS

L.15.IBFS - IBFS(CA L-15 Introduction to Equipment...

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IBFS (CA) L-15: Introduction to Equipment Leasing (EL) This deals with: 1. Def. of Equipment Leasing (EL) 2. Concepts and Classification/Types of EL 3. Significance/Advantages and Limitations of EL 1.Def. of EL : An EL is a contractual arrangement/transaction where the owner (Lessor) of equipment transfers the right to use the equipment to the user (Lessee) for an agreed period of time in return for rentals. At the end of the lease period, the asset reverts back to the Lessor unless there is a provision for renewal of contract or for transfer of ownership to the Lessee. 2. Concepts and Classification/Types of EL: A. Concepts of EL : (i) Meaning : Conceptually, EL is a contractual arrangement/transaction in which a party owning an asset/equipment (Lessor) provides the asset for use to another or transfer the right to use the equipment to the user (Lessee) over a certain or for an agreed period for consideration in the form of/in return for periodic payments (rentals) with or without a further payment (premium). At the end of the period of contract (Lease Period), the asset/equipment reverts back to the Lessor 1
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unless there is a provision for the renewal of the contract. Leasing essentially involves the divorce of ownership from the economic use of an asset/equipment. It is a device of financing the cost of an asset. (ii) Essential Elements of Lease : Parties to the contract (Lessor or Owner; Lessee or User; Lease Brokers such as MBs or Subsidies of Banks; Lease Financier for refinancing of the lease transactions). Asset (The equipment viz. automobile; plant and machinery; land and building; factory, a running business; aircraft; and so on) Ownership separated from User Term of lease (Period of lease which stretches over economic life in case of FL and which stretches over less than economic life in case of OL, and perpetual if lease can be renewed at option of Lessee) Lease Rentals (Structured to compensate Lessor for investment made in the asset like depreciation, interest on investment, repairs and so forth borne by the Lessor and service charges over the lease period) Modes of Terminating Lease (1. Lease is renewed on a perpetual basis, or for a definite period, 2. Asset reverts to Lessor, 3. Asset reverts to Lessor 2
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and he sells to third party, 4.Lessor sells the asset to Lessee). (iii) Operational aspects of EL : Lessee identifies the specified equipment, its supplier, price, terms (warranties and guaranties), and delivery period, etc. and approaches the Leasing Company with a lease proposal. The negotiations between the Lessor and Lessee revolve around the duration, lease rentals, terms and conditions relating to usage, maintenance and insurance of the equipment, etc. After executing the lease contract, Lessor buys the equipment and delivers it to Lessee. B. Classification/Types of EL
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This note was uploaded on 01/28/2011 for the course FIN 315 taught by Professor Welker during the Spring '09 term at IUP.

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L.15.IBFS - IBFS(CA L-15 Introduction to Equipment...

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