Leasing-2 - Leasing Leasing Leasing The process by which a...

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Unformatted text preview: Leasing Leasing Leasing: The process by which a firm can obtain the use of certain fixed assets for which it must make a series of contractual , periodic, tax deductible payments. payments. LESSEE: The lessee is the receiver of the service of the assets under lease contract. service Lessor: Ones one who grants a lease. Lessor: Owner of the assets Owner # Lease Operating Leases Contractual agreement Maturity - less than 5 years Periodic payment Cancelable by the option of lessee Penalty --- if cancel before maturity Short lives assets held to maturity Life of the assets may more than the lease period Life Return the asset to the Lessor after lease period After lease period owner May sale the asset or may lease O.L. require the Lessor to maintain FINANCIAL LEASE / CAPITAL LEASE Long term Lease Non cancelable Obligate to pay- lessee Predefined time Similar to Long Term Debt Payment fixed – tax deductible Financial Accounting Standards Board (FASB) Financial Standard No. 13, “Accounting for lease,” a financial or capital lease is defined as one having any of the following elements: following The lease transfers ownership of the property to the The lessee by the end of the lease term. lessee The lease contains an option to purchase the property The at a “bargain price”. The lease term is equal to 75% or more of the The estimated economic life of the property. estimated At the beginning of the lease, the present value of the At lease payments is equal to 90% or more of the fair market value of the leased property. market # Leasing Techniques 1. Direct Lease : 1. A Lease under which a Lessor owns or acquires the Lease assets that are leased to a given lessee. assets 2.Sale and Leaseback : A Lease under which the lessee sells an assets for cash to a prospective Lessor and then leases back the same asset, making fixed periodic payments for its use. use. lessee receive cash minimize liquidity problem obligation – fixed periodic payment 3.Leveraged Lease 3.Leveraged A lease under which the Lessor acts as an equity lease participant, supplying only about 20% of the cost of asset, with a lender supplies the balance. asset, # Lease agreement maintenance clause renewal options purchase options # Advantages of Lease Leasing allows the lessee, in effect to depreciate land, which is prohibited if the land were purchased. which Assets & Liabilities in the Balance Sheet, leasing may Assets result in misleading financial ratio. result Sale & Leaseback arrangement may permit the firm to Sale increase its liquidity by converting an existing asset into cash, which can then be used as working capital. into Leasing provides 100% financing. When a firm becomes bankrupt or is Reorganized, the When maximum claim of lessors against the corporation is 3 years of lease payments, and the lessor of course gets the asset back. In a lease arrangement, the firm may avoid the cost of In obsolescence. obsolescence. A lessee avoids many of the restrictive covenants that lessee are normally included as part of a long term loan. are # Disadvantages of Leasing A lease does not have a stated interest lease cost cost Lessee is generally prohibited from Lessee making improvements making If a lessee leases an asset that If subsequently become obsolete, it still must make lease payments must ...
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