Lease education and consulting by
Vinod Kothari|
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You are visitor number Leasing generically: to this site.
Whatever be the type of the lease plan, there is a basic change in the "usual" mode of acquiring an asset. If the usual mode is buy the asset, say, with borrowed funds, the following important changes take place in case of a lease:
Structural differences
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Type of Change |
Loan |
Lease |
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The role/nature of the user |
Borrower |
Lender |
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The role/description of the provider |
Lender |
Lessor |
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What is given to the user |
Money |
The equipment itself, e.g., if the user wanted a loan to buy a car, the lessor would provide the car itself. |
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Nature of the Provider's security |
Charge/lien over the asset |
Ownership of the asset |
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Nature of payments made by the user |
Repayment of loan + Interest on loan |
Lease rentals |
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Length of use by user |
Forever. |
For the period of lease, subject to end-of-term options |
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Consequential Differences
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Applicable law |
Loan-related laws |
Asset-hiring related laws - treated as bailment of a commodity |
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Rights of Lessor over the asset |
Rights as per security/lien agreement, a derivative right |
Absolute property rights - repossessory rights normally available without intervention of judiciary |
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Tax consequences for provider |
Tax payable on interest earned |
Tax payable on rentals earned; capital allowances (depreciation) allowable on asset (in some countries, this is subject to true lease conditions) |
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Tax consequences for user |
Tax deduction admissible on interest; depreciation claimable on asset owned |
Lease payments (rentals) deductible for tax purposes (in some countries, this is subject to true lease conditions) |
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Accounting for the asset |
The asset sits on the user Balance-Sheet |
The asset appears in the provider's balance sheet (subject to accounting standards on leasing) |
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Accounting for the liability |
Loan liabilities appear on the balance sheet |
Lease liabilities are periodic liabilities, may be Off-the-Balance-Sheet (subject to accounting standards on leasing) |
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