• A lease is a contract agreement between a lessor and a lessee that give the lessee, for a specific period of time, the right to use specific property which is owned by the lessor in return for specified, periodic cash payment called rental payment.
• A business can lease any type of equipment or property that is available for a lease.
• A lease agreement for an identical storage room would vary for lessor and lessee.
• A lease may be anything from a short period of time to the entire expected economics life of the asset.
• Also the rental payment as the book calls it may be fixed from year to year or it could go up or down.
• There may be some restricting on the lessee on making dividends payment or incurring further debt to protect the lessor from default.
• The lessee could terminate the lease but a penalty charge would be charger
• So your lease is over what now well the lessee could either terminate the lease, he could renew the lease for the same period, or just purchase the asset at a normal price.
• In Canada there are 3 type of lessors 1) Manufacturer Finance Companies, 2) Independent Finance Companies, and 3) Traditional Financial Institutions.
BENEFITS OF LEASE
• 100% financing at fixed rates = signed with any down payment requirement. Lease payments are often fixed protecting the lessee against any inflation.
• Protection against obsolescence = helps the lessee by trading in an asset transferring any residual risk to the lessor.
• Flexibility = lease agreement is less restrictive than any other debt agreement.
• Less costly financing for lessee, tax incentives for lessor
• Off balance sheet financing = certain leases do not add any debt on a balance sheet or affect any financial ratios
WAYS TO REPORT A LEASE
• Do not capitalize any leased assets – an executory contract approach = because the lessee doesn’t own the property, is should not