Basics Of Leasing

What is a lease?

A lease is a long term agreement to rent equipment, land, buildings, or any other

asset. In return for most - but not all - of the benefits of ownership, the user (lessee)

makes periodic payments to the owner of the asset (lessor). The lease payment

covers the original cost of the equipment or other asset and provides the lessor a

profit.

A lease arrangement involves a lessor conveying the right to a lessee to

use a leased asset for an agreed period of time in return for a series of

payments [IAS17.3] [SIC-27.5]

Types of leases

There are three major kinds of leases: the financial lease, the operating lease, and

the sale and leaseback.

A financial lease is usually written for a term not to exceed the economic life of the

equipment. You will find that a financial lease usually provides that: Periodic

payments be made, Ownership of the equipment reverts to the lessor at the end of

the lease term, The lease is non-cancelable and the lessee has a legal obligation to

continue payments to the end of the term, and The lessee agrees to maintain the

equipment.

Leases that meet specified criteria are classified as finance leases.

Those criteria relate to the transfer of substantially all the risks and

rewards incident to ownership by the lessor, to the lessee [IAS17.3,5-6]

The operating lease, or "maintenance lease," can usually be canceled under

conditions spelled out in the lease agreement. Maintenance of the asset is usually

the responsibility of the owner (lessor). Computer equipment is often leased under

this kind of lease.

Leases that are not finance leases are operating leases [IAS17.3]

The sale and leaseback is similar to the financial lease. The owner of an asset sells it

to another party and simultaneously leases it back to use it for a specified term. This

arrangement lets you free the money tied up in an asset for use elsewhere. You'll find

that buildings and large