Leasing

Leasing could be defined as an arrangement between lessor (owner of the asset/goods) and lessee (user of the asset/goods) whereby lessor owning an asset gives it on lease to the lessor for using it for a certain period, subject to renewal, in lieu of periodical payments called as lease rentals. At the end of the lease period the asset would continue to be owned by the lessor; lease could be renewed for a further period; lessor could sell the asset to a third party; lessee agrees to buy the leased asset.

The purpose of the leasing could be avoiding risk of ownership, inadequacy of capital for buying an asset and tax benefit. In a new venture, entrepreneur may not possess surplus capital to buy an asset and may choose to go for leasing, thereby avoiding risk of ownership, Under lease arrangement, both lessor and lessee derive tax benefits. Lessor gets benefit of depreciation on the asset leased and lessee could show lease rental as expenses in its books of account.

The variety of assets which could be leased include residential/commercial land, building, Plant & machinery, Storage, Vehicles, lockers, agriculture land, medical equipment and other equipment.

Advantages

* The lease rentals payment are spread over a period of time thereby cash flows for the business could be ensured.

* When opting for lease the capital could be utilized for a better deployment.

* Lessee may go for quality assets under leasing arrangement although it may not be possible to afford quality assets for outright purchase.

* Asset on lease become an off Balance Sheet item as lease expenses appear is P&L statement.

* In an advanced technological era, where technology changes are rapid, lessee might avoid risk on technology obsolescence.

Disadvantages

* Lease rentals are treated as expenses rather than capital deployment towards an asset.

* Lease expenses reduce the profitability of the venture that lead to lower returns for the share holders.

* In case of an appreciating asset, the venture can not derive benefit out of the asset value appreciation.

* The onus of maintenance and proper operation of asset lies with lessee.

* Investors/Financiers treat long term lease as debt, which makes the venture vulnerable to raising further debt or tap capital market for raising funds.

Keep watching this space for more interesting updates!