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- Leasing has grown as a popular mode of financing fixed assets due to various economic reasons for the adoption of lease transactions viz: 100% financing, Flexibility of use for the tax benefits, the lessor receives the equivalent of interest as well as an asset with some remaining value at the end of the lease term.
- Leases can be structured to allow manipulation of the tax benefits associated with the leased asset. They can be used to transfer the ownership of the leased asset, along with the risk associated with the ownership.
- For accounting and reporting purposes, leases have been classified as operating and capital lease with respect to lessee and as operating, sales-type, direct financing, leveraged lease with respect to lessor.
- A lease is often marketed on the strength of a dubious advantage called the "Off-Balance- Sheet Financing" which purports that a liability of balance sheet does not affect the debt capacity of a firm. It must be noted that a capital lease whether on or off the balance sheet affects the borrowing capacity and increases the financial risk.
- Of the aforesaid classifications, the classification in terms of capital lease and operating lease is of fundamental importance in the financial analysis and accounting for leases. The distinction is drawn on the basis of the risks and rewards of ownership transferred from the lessor to the lessee. If a lease transfers a substantial part of the risks and rewards it is classified as a capital lease; otherwise, it is called an operating lease. To assess the default risk of a lease, the lessor has to examine the creditworthiness of the lessee.
- Given the long-term relationship envisaged by a capital lease, the unlimited innovative ways of structuring a lease, and the legal and tax complexities that go with the structuring of such leases, selecting a lessor cannot be accomplished by applying the "minimum lease quote" as the sole criterion of appraisal.
- SFAS-28 defines Sell and lease back as a transaction where the owner sells the property and leases back all or part of it. The owner of the property is the seller-lessee and the purchaser is the purchaser-lessor.
- General description of leasing arrangements including the basis of contingent rental payments, terms of renewals, purchase options, escalation clauses, constraints on lease agreements as additional debt, dividends, leasing limitations must be disclosed.
- In case of capital leases, gross assets (by major property categories), accumulated depreciation, liabilities with current and non-current classification, minimum future lease payments for each of the next five years showing deductions for executory costs, profit, imputed interest, minimum sub-lease income due in future periods under non-cancellable sub-leases and total contingent rentals actually incurred for each period are to be reported separately.
- We have also studied the Real estate leases involving land exclusively or in part, a leveraged lease involving significant long-term non-recourse financing by a third party creditor. With the concluding discussion on Indian and International statements of leases.