Leasing is an ancient form of financing that is now welcomed almost everywhere in the world. Legally, a lease contract is not an sale of an object, but a sale right [the right to use an object] at a specific time. According to it, there are two parties who are the owners of the assets or less, and the other party is the lessee or the party that leases the assets. The lessee uses the asset for a specified period of time and pays the rent. The ownership of the assets is borne by the lessor, but is owned by the lessee and the right to use is transferred to the lessee.
It has the following different types. The two basic types of leasing are: financial leasing and operating leasing. These explanations are as follows:
[1] Financial lease: from
Under the finance lease, all risks and rewards of ownership of the assets are transferred to the lessee. Ownership or ownership may or may not be transferred. Financial leasing is a bit like a hire purchase agreement. Under the finance lease, the lessee has the right to exercise the option to become the owner of the asset after paying the agreed amount of installment payment.
example:
Suppose AB has rented a new car for three years. It is also assumed that at the end of three years, AB will be required to obtain vehicle ownership for free. Here, not only is the vehicle leased, but AB also uses the lease agreement as a means of vehicle financing. This type is called capital lease or financial lease.
[2] Operating lease: from
Operating leases are non-financial leases under International Accounting Standards [IAS-17]. According to the operating lease, the lessor has the right to let the lessee use the assets or property within the specified time, but the risks and rewards of ownership are retained by the smaller ones.
example:
Suppose my business has a complete 6th floor in a multi-storey building in Eden Tower. Further assume that my company rents some rooms on this floor to XY.
Now, if the value of this building increases due to good business activity, the lessor, MY, can get this added benefit by selling the room or increasing the rent. On the other hand, if the value of the building exceeds, then the MY company will be the victim of the loss. This type of lease is called an operating lease.
Below these two main types, some other types of leases are explained below:
[3] Sales and leaseback: from
According to the sales and leaseback agreement, the assets are first sold to financial institutions. The sale is based on real market value. After that, the assets will be reclaimed. This type of lease is beneficial to companies that do not want to show high debt balances in their financial statements.
[4] Capital lease: from
Such leases are administered by the Financial Standards Committee, which does not apply to Pakistan. Under this type, when the lessee acquires the asset at the time of the lease, it also recognizes it as a liability in the financial statements.
[5] Leverage lease: from
This type of lease involves three parties, including lenders, lessors and lessees. The lender and the lessor work together to accumulate funds to purchase assets. The purchased assets will then be given to the lessee through the lease. The lessee pays the lessor on a regular basis and the lessor pays the lender again.
[6] Cross-border leasing: from
This means operating lease agreements in other countries. In the current situation, this type of lease is very difficult. The reason is that there are different accounting treatments, taxes and intangible standards in foreign countries. Tax rules also vary from country to country. Therefore, how to propose such a lease agreement in the financial statements will create a big problem.
However, as in recent developments, IAS has treated the accounting treatments of global projects in a similar way, hoping that cross-border leasing will flourish in the near future.
Orignal From: Types and examples of leases
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