Leasing

12 Key excerpts on "Leasing"

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  Evaluating Capital Projects

  • Ahmed Riahi-Belkaoui(Author)
  • 2000(Publication Date)
  • Praeger

    (Publisher)

  Chapter 6 Leasing versus Purchasing INTRODUCTION Leasing has recently become an important source of financing for many types of assets. The lessee acquires the use of an asset while the title is retained by the lessor. More specifically, a lease is a contract between an owner (the lessor) and another party (the lessee) that grants the lessee the right to use the lessor's property under certain conditions and for a specified period of time. Because of the contractual nature of lease obligations, a lease should be considered a fi- nancing device and an alternative to debt financing. Both the lease rental pay- ments and the payments of principal and interest on debt are fixed obligations. Any default in the payment of either obligation can create serious problems for a firm. The decision to lease an asset is generally evaluated by comparing it with the borrowing decision necessary for an outright purchase of the same asset. Dif- ferent valuation models have been proposed, and any choice can be challenged because of the controversial issues surrounding a given model and its corre- sponding variables and parameters. The main purpose of this chapter is to ex- plain Leasing arrangements and the main issues in financial Leasing; and to provide a methodology for analysis. The lease as a new form of financing undergoes constant change, as shown by the number and variations of the sources of Leasing arrangements. Financial institutions involved in Leasing differ mainly in their degree of specialization and include independent Leasing companies, service Leasing companies, lease brokers, commercial brokers, and insurance companies. 146 Evaluating Capital Projects TYPES OF Leasing ARRANGEMENTS Although it is possible to describe major forms of lease arrangements, the options, terms, and conditions may vary from contract to contract, giving a firm great flexibility in the adaptation of Leasing as a financing method.

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  Financial Accounting Theory and Analysis

  Text and Cases

  • Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 1 407 B usinesses generally acquire property rights in long‐term assets through purchases that are funded by internal sources or by externally borrowed funds. The accounting issues associ- ated with the purchase of long‐term assets were discussed in Chapter 9. Leasing is an alternative means of acquiring long‐term assets to be used by firms. Leases that are not in‐substance pur- chases provide for the right to use property by lessees, in contrast to purchases that transfer property rights to the user of the long‐term asset. Lease terms generally obligate lessees to make a series of payments over a future period; thus, they are similar to long‐term debt. However, if a lease is structured in a certain way, it enables the lessee to engage in off–balance sheet financing because certain leases are not reported as long‐term debt on the balance sheet. Business managers often wish to use off–balance sheet financing to improve the financial position of their com- panies. However, as noted earlier in the text, efficient market research suggests that off–balance sheet debt is incorporated into user decision models in determining the value of a company. Leasing has become a popular method of acquiring property because there’s usually no large outlay of cash at the beginning of the lease as there is with an outright purchases. Leasing also has several other advantages: 1. It offers 100 percent financing at fixed rates. Leases often do not require down payments from the lessee. This helps companies conserve scarce cash, which is an especially desirable feature for new and developing companies. In addition, the lease payments usually remain fixed, thereby protecting the lessee against inflation. 2. It permits alternative uses. A Leasing arrangement provides a firm with the use and con- trol over the assets without incurring huge capital expenditure and requiring to make only periodical rental payments.

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  Wiley Interpretation and Application of IFRS Standards 2020

  • (Author)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  533 22 INTRODUCTION Leasing has long been a popular financing option for the acquisition of business property. During the past few decades, however, the business of Leasing has experienced staggering growth, and much of this volume is reported in the statements of financial position. The tremendous popularity of Leasing is quite understandable, as it offers great flexibility, often coupled with a range of economic advantages over ownership. Thus, with Leasing, a lessee (borrower) is typically able to obtain 100% financing, whereas under a tradi- tional credit purchase arrangement the buyer would generally have to make an initial equity investment. In many jurisdictions, a Leasing arrangement offers tax benefits compared to the purchase option. The lessee is protected to an extent from the risk of obsolescence, although the lease terms will vary based on the extent to which the lessor bears this risk. For the les- sor, there will be a regular stream of lease payments, which include interests that often will be at rates above commercial lending rates, and, at the end of the lease term, usually some residual value. The IASB issued a new leases standard which supersedes the previous leases stand- ard. The previous leases standard, IAS 17, focused on identifying when a lease is eco- nomically similar to purchasing the asset being leased. When a lease was determined to be economically similar to the purchase of the asset being leased, the lease was classified as a finance lease and reported on the balance sheet. An asset was recognised to bring into account the underlying asset effectively purchased, together with the corresponding liability of the lease. All other leases were classified as operating leases and not reported on the company’s balance sheet, i.e., the expense was reported in the income statement as and when incurred.

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  Foundations of International Commercial Law

  • Christian Twigg-Flesner(Author)
  • 2021(Publication Date)
  • Taylor & Francis

    (Publisher)

  When we speak of “Leasing”, we need to deal with two separate categories of Leasing. First, there are “operating leases”. Here, the person acquiring the goods (the lessee) needs goods for a limited period of time, often for a specific purpose. The owner of those goods (the lessor) will agree to supply the goods in question to the lessee for an agreed period of time, in return for which the lessee will make a payment (whether as a lump-sum or through regular instalments, depending on the duration of the Leasing period). The payments will generally reflect the value to the lessee of being able to use the goods and the profit margin for the lessor. At the end of the Leasing period, the lessee will return the goods to the lessor, who can then lease the same goods again to another lessor. An operating lease is a standard hire agreement and is commonly used where short-term use of goods is all that is needed. Examples include car hire, hiring construction machinery for a period of time, or scaffolding for construction projects.

  The second category is a rather different type of arrangement. This is the finance lease. Rather than the simple two-party arrangement of an operating lease, a finance lease involves three parties: the seller/supplier of the goods in question, a finance company and the person seeking to acquire the goods. Finance leases may be used where the person seeking to acquire the goods does not necessarily wish to become the outright owner of the goods but still wishes to have long-term use of the goods, usually for most of their product life-span. Instead of acquiring those goods directly from the seller/supplier, the goods are sold to a finance company which then enters into a Leasing agreement with the lessee.

  Figure  6.1   Structure of a financial Leasing transaction

  The basic mechanism of a Leasing arrangement is as follows: first, the supplier of the goods and the prospective lessee agree on the goods to be supplied. Then, a finance company – the lessor – agrees to buy the goods from the supplier. The lessor will then enter into a separate contract with the lessee for the supply of the goods in return for regular payments. The lessee may or may not decide to acquire outright ownership at the end of the agreed Leasing period.3

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  System of National Accounts 2008

  • International Monetary Fund(Author)
  • 2009(Publication Date)
  • INTERNATIONAL MONETARY FUND

    (Publisher)

  An operating lease is one where the legal owner is also the economic owner and accepts the operating risks and receives the economic benefits from the asset by using it in a productive activity. One indicator of an operating lease is that it is the responsibility of the legal owner to provide any necessary repair and maintenance of the asset. Under an operating lease the asset remains on the balance sheet of the lessor.

  17.302 The payments made under an operating lease are referred to as rentals and are recorded as payments for a service. The character of operating leases may most easily be described in relation to equipment since operating leases often concern vehicles, cranes, drills etc. In general, though, any sort of non-financial asset, an intellectual property product or a non-financial asset may be subject to an operating lease. The service provided by the lessor goes beyond the mere provision of the asset. It includes other elements such as convenience and security, which can be important from the user’s point of view. In the case of equipment, the lessor, or owner of the equipment, normally maintains a stock of equipment in good working order that can be hired on demand or at short notice. The lessor must normally be a specialist in the operation of the equipment, a factor that may be important in the case of highly complicated equipment, such as computers, where the lessee and his employees may not have the necessary expertise or facilities to service the equipment properly themselves. The lessor may also undertake to replace the equipment in the event of a serious or prolonged breakdown. In the case of a building, the lessor is responsible for the structural integrity of the building, so would be responsible in the case of damage due to a natural disaster, for example, and is usually responsible for ensuring that elevators, heating and ventilation systems function adequately.

  17.303 Operating Leasing developed originally to meet the needs of users who require certain types of equipment only intermittently. Many operating leases are still for short periods though the lessee may renew the rental when the period expires and the same user may hire the same piece of equipment on several occasions. However, with the evolution of increasingly complicated types of machinery, especially in the electronics field, the servicing and backup facilities provided by a lessor are important factors that may influence a user to rent. Other factors that may persuade users to rent over long periods rather than purchase are the consequences for the enterprise’s balance sheet, cash flow or tax liability.

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  Handbook of Singapore — Malaysian Corporate Finance

  • Tan Chwee Huat, Kwan Kuen-Chor, Tan Chwee Huat, Kwan Kuen-Chor(Authors)
  • 2014(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  Chapter 11 Equipment Leasing Ta Huu Phuong and Gn Hiang Lin 11.01 Introduction Leasing was one of the fastest growing financial industries in the 1970s. Its rate of growth was estimated to be between 30 and 50% pa during the second half of the 1970s and only slightly lower during the first part of the 1980s. Indeed, equipment Leasing is becoming popular on the local financial scene. In 1984 alone, lease business in Singapore exceeded S$600m and accounted for about 10% of new investment financing (Table 11.1). This chapter discusses equipment Leasing in Singapore. It has two parts: Part I covers the various aspects of a lease transaction and Part II describes the local Leasing industry. Before we begin, we shall consider the definition of Leasing via a lease agreement. This will give us an understanding of the concept of Leasing. 11.02 What is Leasing? There is no legal definition of Leasing in Singapore. Essentially, a lease agreement is a contract between two parties where one party owns the equipment and grants the use of it to the other party who pays a series of lease rentals to the first party with the first payment usually due as soon as the contract is executed. Such a contract is legally binding and is governed by the general law of contract and the common law. The first party is referred to as the lessor and the second party as the lessee. Lease contracts are of two types: operating leases and financial leases. An operating lease normally requires the lessor to bear responsibility for maintaining and serving the leased asset, and the lease can be revoked by the lessee at any time by paying a small compensation. The lease of a building or a piece of land is generally an operating lease. A financial lease on the other hand only requires the lessor to provide the financing 177

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  Financial Reporting

  • Janice Loftus, Ken Leo, Sorin Daniliuc, Belinda Luke, Hong Nee Ang, Mike Bradbury, Dean Hanlon, Noel Boys, Karyn Byrnes(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity. 11.1.1 What is a lease? Appendix A of AASB 16/IFRS 16 defines a lease as follows. A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. Paragraphs B9 to B31 of AASB 16/IFRS 16 provide detailed guidance to help in assessing whether a contract is, or contains, a lease. The transfer of the right to use is essential in the definition and therefore the guidance focuses on clarifying the concept of the right to use. According to paragraph B9, that includes: (a) the right to obtain substantially all of the economic benefits from use of the identified asset (as described in paragraphs B21–B23); and (b) the right to direct the use of the identified asset (as described in paragraphs B24–B30). Right to obtain benefts from use of the asset The lessee may obtain the benefits either directly (e.g. by holding and using the asset itself) or indirectly (e.g. by subLeasing the asset to another entity). A lessee is considered not to have the right to obtain benefits from the asset if they can only derive benefits by using the asset in conjunction with other goods and services provided by the supplier (and not available for separate purchase from the supplier or alternative suppliers). ILLUSTRATIVE EXAMPLE 11.1 Use of an asset in conjunction with other goods Neighbours Ltd, a healthcare provider, enter into a 4‐year contract with Refex Ltd, a supplier for specialised diag- nostic radiography equipment. Neighbours Ltd will hold and use the equipment at one of its private hospitals.

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  Introduction To Accounting And Managerial Finance, An: A Merger Of Equals

  A Merger of Equals

  • Harold Bierman, Jr(Authors)
  • 2010(Publication Date)
  • World Scientific

    (Publisher)

  Leasing an automobile for four years with monthly payments that are comparable to financing terms for a purchase might fit this description. In current practice, two types of leases are distinguished from the lessee’s point of view. Leases that essentially may be regarded as purchases are called capital leases and are accounted for as an acquisition of a long-term asset with corresponding recognition of the payment obligation as a liability. All other leases are called operating leases and are treated as the utilization of services, with rental payments recognized as current expenses as they come due. The accounting for leases has been defined by Financial Accounting Standards Board Statement No. 13 and the supplementary statements issued to explain FASB (Financial Accounting Standards Board) No. 13. There are several criteria that may be used to determine whether a lease qualifies for classification as a capital lease. Among these are provisions for the transfer of ownership of the property to the lessee during the lease term, provisions for purchase of the property by the lessee at a bargain price, a lease term that is equal to or greater than 75 percent of the useful life of the property, or the present value of minimum lease payments being equal to or greater than 90 percent of the fair value of the property at the beginning of the lease term. 1 If a lease meets any one of these criteria , it is classified as a capital lease. Otherwise, it is regarded as an operating lease. 1 This is a simplified explanation. For more details concerning the specific requirements, see Financial Accounting Standards Board, Statement of Financial Accounting Standards No. 13, Accounting for Leases (Stamford, CT: FASB, 1976). Buy versus Lease 225 With a capital lease, the lessee must show: a. The initial present value of the lease payments as an asset (the asset is to be depreciated through time in the same manner as any other depreciable asset).

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  Intermediate Accounting, Student Practice and Solutions Manual

  • Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  21-1 CHAPTER 21 Accounting for Leases Student Practice and Solutions Manual Chapter 21 Review LEARNING OBJECTIVES 1. Understand the environment related to Leasing transactions. 2. Explain the accounting for finance leases. 3. Explain the accounting for operating leases. 4. Discuss the accounting and reporting for special features of lease arrangements. *5. Describe the lessee’s accounting for sale-leaseback transactions. *6. Describe the lessor’s accounting for a direct financing lease. *7. Apply lessee and lessor accounting to finance and operating leases. *8. Compare the accounting for leases under GAAP and IFRS. Many businesses lease substantial portions of the property and equipment they use in their business organization as an alternative to ownership. Because Leasing provides some finan- cial, operating, and risk advantages over ownership, it has become the fastest growing form of capital investment. This increased significance of lease arrangements in recent years has intensified the need for uniform accounting and complete informative reporting of Leasing transactions. Chapter 21 presents a discussion of the accounting issues related to Leasing arrangements from the point of view of both the lessee and the lessor. LO 1: Understand the environment related to Leasing transactions. The Leasing Environment A lease is a contractual agreement between a lessor and a lessee that gives the lessee the right to use specific property, owned by the lessor, for a spec- ified period of time. In return for this right, the lessee agrees to make rental payments over the lease term to the lessor. Advantages of Leasing In discussing the advantages of Leasing arrangements, advo- cates point out that Leasing allows for the lessee: (a) 100% financing, (b) protection against obsolescence, (c) flexibility, and (d) less costly financing. For the lessor, it allows: (a) profitable interest margins, (b) sales stimulation, (c) tax benefits, and (d) return of high residual value.

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  Applying IFRS for SMEs

  • Bruce Mackenzie, Allan Lombard, Danie Coetsee, Tapiwa Njikizana, Raymond Chamboko(Authors)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  As the Standard gives no detailed guidance on the application of lease accounting to arrangements containing a lease, an entity may choose to look at the principles in full IFRS. IFRIC 4, Determining Whether an Arrangement Contains a Lease in full IFRS, provides detailed guidance on whether an arrangement contains a lease element.

  The guidance requires that all the following three criteria be met:

  • The ‘purchaser’ has the ability or right to operate the asset or direct others to operate the asset in a manner it determines while obtaining or controlling more than an insignificant amount of the output or other utility of the asset.
  • The ‘purchaser’ has the ability or right to control physical access to the underlying asset while obtaining or controlling more than an insignificant amount of the output or other utility of the asset.
  • Facts and circumstances indicate that it is remote that one or more parties other than the ‘purchaser’ will take more than an insignificant amount of the output or other utility that will be produced or generated by the asset during the term of the arrangement, and the price that the ‘purchaser’ will pay for the output is neither contractually fixed per unit of output nor equal to the current market price per unit of output as of the time of delivery of the output.

  DEFINITION OF A LEASE

  A lease is an agreement whereby the lessor conveys to the lessee in return for a pa yment or series of payments the right to use an asset for an agreed period of time.

  CLASSIFICATION OF LEASES

  Leases are classified as either finance or operating leases. The key difference is that with a finance lease, the lease substantially transfers all the risks and rewards incidental to ownership of the asset from the lessor to the lessee. Should the contract not substantially transfer all the risks and rewards incidental to ownership, then the lease is accounted for as an operating lease.

  The difference in the accounting for an operating versus a finance lease is that with a finance lease, the asset is derecognized from the lessor's statement of financial position. For an operating lease, the asset remains on the lessor's statement of financial position. This accounting is discussed in greater detail further in the chapter. Exhibits 18.1 and 18.2

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  International Financial Reporting Standards (IFRS) Workbook and Guide

  Practical insights, Case studies, Multiple-choice questions, Illustrations

  • Abbas A. Mirza, Graham Holt, Magnus Orrell(Authors)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  4.4 It is evident from these descriptions that a large degree of judgment has to be exercised in classifying leases; many lease agreements are likely to demonstrate only a few of the situations listed, some of which are more persuasive than others. In all cases, the substance of the transaction needs to be properly analyzed and understood. Emphasis is placed on the risks that the lessor retains more than the benefits of ownership of the asset. If there is little or no related risk, then the agreement is likely to be a finance lease. If the lessor suffers the risk associated with a movement in the market price of the asset or the use of the asset, then the lease is usually an operating lease.

  4.5 The purpose of the lease arrangement may help the classification. If there is an option to cancel, and the lessee is likely to exercise such an option, then the lease is likely to be an operating lease.

  4.6 Classifications of leases are to be made at the inception of the lease. The inception of a lease is the earlier of the agreement date and the date of the commitment by the parties to the principal provisions of the lease. If the lease terms are subsequently altered to such a degree that the lease would have had a different classification at it inception, a new lease is deemed to have been entered into. Changes in estimates such as the residual value of an asset are not deemed to be a change in classification.

  4.7 Leases of land, if title is not transferred, are classified as operating leases, as land has an indefinite economic life and a significant reward of land ownership is its outright ownership and title to its realizable value. If the title to the land is not expected to pass to the lessee, then the risks and rewards of ownership have not substantially passed, and an operating lease is created for the land. Leases of land and buildings need to be treated separately, as often the land lease is an operating lease and the building lease, a finance lease.

  4.8

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  Wiley IFRS

  Practical Implementation Guide and Workbook

  • Abbas A. Mirza, Graham Holt, Liesel Knorr(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  Chapter 11 LEASES (IAS 17)

  BACKGROUND AND INTRODUCTION

  This Standard prescribes the accounting treatment for leases in the financial statements of lessees and lessors.

  SCOPE

  This Standard shall be applied in accounting for leases other than

  1. Leases to explore for or use nonregenerative resources such as oil, natural gas, and so forth
  2. Licensing arrangements for motion pictures, video recordings, music, and so on

  This Standard shall not be applied in the measurement of

  • Property held by lessees that is an investment property (see IAS 40)
  • Investment property provided by lessors under operating leases (see IAS 40)
  • Biological assets held by lessees under finance leases (see IAS 41)
  • Biological assets provided by lessors under operating leases (see IAS 41)

  DEFINITIONS OF KEY TERMS

  (in accordance with IAS 17)

  Lease. An agreement whereby the lessor conveys to the lessee in return for payment the right to use an asset for an agreed period of time.

  Finance lease. A lease that transfers substantially all the risks and rewards of ownership of an asset. Title need not necessarily be eventually transferred.

  Operating lease. A lease that is not a finance lease.

  Minimum lease payments. The payments over the lease term that are required to be made. For a lessee, this includes any amounts guaranteed to be paid; for a lessor, this includes any residual value guaranteed to the lessor.

  The definition of a lease includes those contracts for hire of an asset that contain provisions for the hirer to acquire title to the asset upon fulfillment of agreed conditions—these are sometimes called hire purchase contracts.

    PRACTICAL INSIGHT

  RHI AG, an Austrian entity, states in its financial statements that the move to International Financial Reporting Standards (IFRS) has increased the opening book value of all its noncurrent assets by €69 million. It explains that, under Austrian generally accepted accounting principles (GAAP), the depreciation of noncurrent assets is influenced partly by tax considerations, while under IFRS, it is in line with expected useful lives.

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