Chapter 01

Lease/ Lease Financing

The Lease may be defined as a contractual arrangement in which a party owning an asset provides
the asset for use to another, the right to use the assets to the user over a certain period of time, for
consideration in the form of periodic payment, with or without further payment.
Another way we can say that a Lease is a contract where a party being the owner (lessor) of an
asset (leased asset) provides the asset for use by the lessee at a consideration (rentals), either fixed
or dependent on any variables, for a certain period (lease period), either fixed or flexible, with an
understanding that at the end of such period, the asset, subject to the embedded options of the
Lease, will be either returned to the lessor or disposed off as per the lessor’s instructions.
Origin
Leasing was prevalent during the ancient Sumerian and Greek civilizations, where the leasing of
land, agricultural implements, animal mines and ships took place. The practice of leasing came
into being sometime in the latter half of the 19th century when the railroad manufacturers in the
U.S.A. resorted to the leasing of rail cars and locomotives.
The equipment leasing industry began in 1973 when the first leasing company was appropriately
named First Leasing. This industry, however, remained relegated to the background until the early
eighties because the need for this industry was not strongly felt in the industry. The public sector
financial institutions – IDBI, IFCI, ICICI and the State Financial Corporations (SCFs) provided
the bulk of the term loans and the commercial banks provided working capital finance required by
the manufacturing sector on relatively soft terms. Given the easy availability of funds at a
reasonable cost, there was obviously no need to look for alternative means of financing.
The credit squeeze announced by the R.B.I coupled with the strict implantation of the Tandon &
Chore committees’ norms on Maximum Permissible Bank Finance (MPBF) for working capital,
forced the manufacturing companies to divert a portion of their long–term funds for their working
capital.
Importance of Lease Finance

Lease finance or lease financing means contract between owner of asset and user of asset. In this
contract only rent is paid at periodical intervals for using of asset by user. If user of asset has no
money to pay initial amount of leasing contract, he can also do contract with third part to pay initial
amount or specific period rent of lease. It will be also lease finance. In following words, we can
explain its importance,

➢ Lease finance is easy to get than getting a loan for buying all fixed assets.
➢ Monthly rent payments for lease finance will be operating expenses. It will be allowed to
deduct total income. So, the company can get tax benefits in lease financing.
➢ It can show as the invisible debt of a company out of its balance sheet. You can show lease
finance in the footnote of the balance sheet if you did a contract directly with the owner of
the asset.

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 ➢ One of the major important points is that it is a more flexible way of finance. You can fix
your need of an asset and get it one lease through lease financing.
➢ A study from IFC has revealed that 30% of total share of lease financing as the investment
of fixed assets is of emerging and developed economies and now 15% of developing
countries.

Legal aspects of leasing

Essentially the following implications for the lessor and the lessee must be maintained.

The lessor must deliver the asset to the lessee, legally authorize the lessee to use the asset, and
leave the asset in peaceful possession of the lessee during the currency of the agreement.

The lessor has an obligation to pay the lease rentals as specified in the lease agreement, to protect
the lessor‘s title, to take reasonable care of the asset, and to return the leased asset on the expiry of
the lease period.

What is the definition of leasing in a finance context?

A. Leasing in finance is a method of investing where the investor purchases an asset and then lets it
appreciate over time.
B. In finance, leasing is the act of buying an asset and then selling it to a consumer at a higher price.
C. Leasing is like a rental agreement. The lessor (usually a leasing company or financial institution)
owns an asset and the lessee (an individual, company, or organisation) pays a regular fee to use this
asset over a specific period.
D. In a financial context, leasing refers to a bank providing a loan to a consumer for a specific asset.

What is a finance lease or a capital lease?

A. finance lease refers to a contractual agreement where the lessee pays for the asset's depreciation,
while the lessor remains the owner.
B. A finance lease is a type of agreement where the lessor covers costs related to maintenance and
insurance, and the lessee only pays for the use of the asset.
C. A finance lease, also known as a Capital Lease, is a contractual arrangement where the risks and
rewards of the asset's ownership essentially transfer to the lessee.
D. In a finance lease, the lessee pays a regular fee to use an asset but ownership never transfers to the
lessee.
What is subleasing and when can it occur?
A. Subleasing is when the original lessee leases the asset they leased from the lessor to a third party,
thereby acting as a lessor. This can happen only if the original lease agreement allows subleasing.

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B. Subleasing is when the lessee purchases the asset at the end of the lease term and then leases it out
to another party. This action can be performed only on the expiry of the original lease.
C. Subleasing occurs when a lessee decides to lease an additional asset from the lessor. It only happens
when the initial lease has expired.
D. Subleasing is when a company sells the asset it originally leased from a lessor back to the same
lessor. It can occur anytime during the leasing period.
Simplified Explanation of Leasing Definition in Finance
Leasing, in its most basic form, is like a rental agreement. The lessor - typically a leasing company or
a financial institution - owns an asset, say a car or an office space.
The lessee - who could be an individual, a company, or an organisation - pays a regular fee to use that
asset over a specific period.
Leasing agreements are a common means to acquire expensive assets without needing to pay the
upfront cost. The importance of leasing in the financial world can't be overstressed, as it provides a
means for firms to effectively manage their resources.
These leasing transactions are classified into two main categories: Operating Lease, and Finance
Lease, also known as Capital Lease.

With an operating lease, you can use the asset, but ownership remains with the lessor. A finance lease,
on the other hand, is a contractual arrangement in which the risks and rewards of asset ownership
essentially transfer to the lessee.

How Corporate Leasing and Sub Leasing Operates

First, let's define what corporate leasing is.

In corporate leasing, a corporation enters into a lease agreement with the lessor. The corporation,
acting as the lessee, then utilises the leased asset in its operations.
Corporate leasing is an integral part of many business models. It is a practical option for businesses
to acquire the necessary equipment or property to run their operations without the high cost of
ownership. Now, what happens when the corporation wants to lease out a portion of its leased
property? That brings us into the realm of subleasing.

Subleasing, as the term suggests, is when the original lessee (the corporation, in this case) leases the
asset it leased from the lessor to a third party, thereby acting as a lessor itself. The third party as such
becomes the sub-lessee.
An important note to remember is that the original lease agreement must allow subleasing. Otherwise,
the lessee may be in violation of the lease terms and conditions.

A real-world example of subleasing would be a company renting a large office space, and then renting
out a portion of that space to another smaller company. The process of both corporate leasing and
subleasing needs to be managed carefully to ensure that all legal and financial implications are clearly

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understood by all parties involved. Ultimately, these leasing strategies provide flexible options for
businesses to manage their resources based on changing needs and circumstances.
Leasing in Business Studies
In Business Studies, leasing is an essential concept that entails the practice of using an asset for a
defined period and paying for its use over time. It's a widespread financial strategy for businesses,
especially for acquiring property or expensive machinery, without the financial burden of purchasing
them outright.

Advantages and Disadvantages of Leasing in Business

Deep diving into the pros and cons can clarify why many businesses opt for leasing. Advantages of
Leasing

• Reduced Initial Expense: Leasing doesn't require the significant upfront investment that
purchasing the asset outright would, thus conserving business' capital for other uses.
• Flexible Terms: Lease terms and conditions are generally flexible and can often be adjusted
to better suit the lessee's specific requirements.
• Hassle-free Maintenance: In many lease agreements, the lessor bears the responsibility of
maintenance, relieving the lessee of this burden.
• Easier Upgrade: Leasing enables businesses to upgrade to newer models or technologies
without any disposal hassle.
Disadvantages of Leasing

• Total Cost: Leasing can be more expensive in the long run because lease payments often
total more than the cost of the asset.
• Lack of Ownership: The lessee does not own the asset and thus cannot sell or alter it.
• Potential for Additional Costs: There may be additional costs involved, such as penalties
for early lease termination or damages to the asset.

Analyzing Two Types of Lease Financing

The two primary types of leases you'll encounter in Business Studies are the Operating Lease and
the Finance Lease.
Operating Lease: In an operating lease, the lessor retains the asset's ownership while the lessee
gets the right to use it for a short period compared to the asset's life. At the end of the lease, the asset
is returned to the lessor.

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Key Features of Operating Lease:

Short-term: Typically, up to 5 years.

Lesser retains risks and rewards of No transfer of ownership at the end of

ownership: lease term.

Finance Lease:

A finance lease, also known as a capital lease, transfers the risks and rewards associated with
ownership from the lessor to the lessee. It often includes a clause for the transfer of ownership to the
lessee at the end of the lease term.
Key Features of Finance Lease:

Long-term: Usually, more than 75% of the asset's life.

Lessee assumes risks and rewards of Possibility to acquire ownership at the

ownership: end of lease term.

Financial Lease vs Operating Lease: A Comparison

When delving into lease agreements, two major types emerge: Financial Lease and Operating Lease.
While both are crucial tools for businesses to acquire assets, they are set apart by their differing
characteristics, benefits, and obligations.
Financial Leases
Also known as a capital lease, a finance lease is characterised by the transfer of nearly all the risks
and rewards associated with ownership to the lessee. These leases are typically long-term agreements
that span a significant part of an asset's useful life. At the conclusion of the lease term, the lessee may
be given an option to purchase the asset at a reduced cost.
Operating Leases
In contrast, an operating lease typically involves a shorter term relative to the asset's life, with the
lessor retaining the risks and rewards of ownership. At the end of the lease term, the ownership of the
asset remains with the lessor. Maintenance, insurance, and other associated responsibilities usually
rest with the lessor, making it a straightforward and flexible option.

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A comparison table helps visualise their distinctions:

Aspects Finance Lease Operating Lease

Term Long-term Short-term

Risks and Rewards Transferred to Lessee Kept by Lessor

End-of-Term Options May purchase asset Return or renew lease

Types of Lease in Details

FASB (Financial Accounting Standards Board) divides lease from the lessee’s standpoint into
groups, capital lease and operating lease. Also, two types of hybrid lease discussed most commonly
and that are leveraged leases and sale and leaseback.

[Link] Lease or Net Lease or Capital Lease:

An agreement where the lessor receives lease payments to cover its ownership costs. The lessee is
responsible for maintenance, insurance, and taxes. Some finance leases are conditional sales or
hire purchase agreements.
In other words, A long-term lease in which the lessee must record the leased item as an asset on
his/her balance sheet and record the present value of the lease payments as debt. Additionally, the
lessor must record the lease as a sale on his/her own balance sheet. A capital lease may last for
several years and is not callable. It is treated as a sale for tax purposes. It is also called a financial
lease.

Structure of Financial Lease: A finance lease is structured to include the following features,
➢ The lessee (the intending buyer) selects the equipment according to his requirements, from
its manufacturer or distributor.
➢ The lessee negotiates and settles with the manufacturer or distributor, the price, the delivery
schedule, installation, terms of warranties, maintenance and payment, and so on.
➢ The lessor purchases the equipment either directly from the manufacturer or distributor
(under straight- forward leasing) or from the lessee after the equipment is delivered (under
sale and lease back).

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 ➢ The lessor then leases out the equipment to the lessee. The lessor retains the ownership
while lessee is allowed to use the equipment.
➢ A finance lease may provide a right or option, to the lessee, to purchase the equipment at a
future date. However, this practice is rarely found in Bangladesh.
➢ The lease period spreads over the expected economic life of the asset. The lease is
originally for a non- cancelable period called the primary lease period during which the
lessor seeks to recover his investment along with some profit. During this period,
cancellation of lease is possible only at a very heavy cost. Thereafter, the lease is subject
to renewal for the secondary lease period, during which the rentals are substantially low.
➢ The lessee is entitled to exclusive and peaceful use of the equipment during the entire lease
period provided he pays the rentals and complies with the terms of the lease.
➢ As the equipment is chosen by the lessee, the responsibility of its suitability, the risk of
obsolescence and the liability for repair, maintenance and insurance of the equipment rests
with the lessee.

The finance company is the legal owner of the asset during duration of the lease. However, the
lessee has control over the asset providing them the benefits and risks of (economic) ownership.

Lease
Agreement

Is Present
Is There a Is Lease Value of
Is There a Term ≥ payments
transfer of Bargain
75% of ≥ 90% of
Ownership? purchase
Economic Fair
option? life?
Value?

2. Operating Lease or Service Lease

According to the IAS-17, an operating lease is one which is not a finance lease. In an operating
lease, the lessor does not transfer all the risks and rewards incidental to the ownership of the asset
and the cost of the asset is not fully amortized during the primary lease period. The lessor provides
services (other than the financing of the purchase price) attached to the leased asset, such as
maintenance, repair and technical advice. For this reason, operating lease is also called service
lease. The lease rentals in an operating lease include a cost for the 'services' provided, and the
lessor does not depend on a single lessee for recovery of his cost. Operating lease is generally used
for computers, office equipment, automobiles, trucks, some other equipment, telephones, and so
on.

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Structure of Operating Lease:
➢ An operating lease is-generally for a period significantly shorter than the economic life of
the leased asset. In some cases, it may be even on hourly, daily, weekly or monthly basis.
The lease is cancellable by either party - during the lease period.
➢ Since the lease periods are shorter than the expected life of the asset, the lease rentals are
not sufficient to totally amortize the cost of the assets.
➢ The lessor does not rely on the single lessee for recovery of his investment. He has the
ultimate interest in the residual value of the asset. The lessor bears the risk of obsolescence,
since the lessee is free to cancel the lease at any time.
➢ Operating leases normally include the maintenance clause requiring the lessor to maintain
the leased asset and provide services such as insurance, support staff, fuel, and so on.

3. Leveraged Lease:

There are three parties to the transaction: (i) lessor (equity investor), (ii) lender and (iii) lessee. In
such a lease, the leasing company (equity investor) buys the asset through substantial borrowing
with full recourse to the lessee and without any recourse to itself. The lender (loan participant)
obtains an assignment of the lease and the rentals to be paid by the lessee are a first mortgaged
asset on the leased asset. The transaction is routed through a trustee who looks after the interest of
the lender and lessor. On receipt of the rentals from the lessee, the trustee remits the debt-service
component of the rental to the loan participant and the balance to the lessor.

4. Sale and leaseback:

In a sale and leaseback transaction, the owner of equipment sells it to a leasing company which in
turn leases it back to the erstwhile owner (the lessee). The ‘leaseback’ arrangement in this
transaction can be in the form of a ‘finance lease’ or an ‘operating lease’. A classic example of this
type of transaction is the sale and leaseback of safe deposit vaults resorted to by commercial banks.
Under this arrangement the bank sells the safe sells the safe deposit vaults in its custody to a leasing
company at a market price which is substantially higher than the book value.
In general, the ‘sale and leaseback’ arrangement is a readily available source of funds for financing
the expansion and diversification programs of a firm. In case where capital investments in the past
have been funded by high cost short-term debt, the sale and lease back transaction provides an
opportunity to substitute the short-term debt by medium-term finance (assuming that the leaseback
arrangement is a finance lease). From the leasing company‘s angle a sale and leaseback transaction
poses certain problems. First, it is difficult to establish a fair market value of the asset being
acquired because the secondary market for the asset may not exist; even if it exists, it may lack
breadth. Second, the Income Tax Authorities can disallow the claim for depreciation on the fair
market value if they perceive the fair market value as not being ‘fair’.
Before taking on a sale and lease back operation or on a sale and rent back operation, a company
has to take the following elements into consideration:
• The assets to be sold must be fully owned and free of any security obligations.
• If the company's goodwill is pledged in favor of a bank, this bank must give its consent
prior to the deal being signed.

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Opportunities of sale and lease back
A sale and rent back operation is the answer to many problems your company may be facing
regardless of its size.
• safeguard the availability of capital stock
• preserve the availability of bank credit facilities
• make funds available for a new project
• restructure the debts
• cash in a latent asset appreciation
• realize, in certain conditions, a company tax saving

Some Other variants of leases

Direct Lease
A direct lease can be defined as any lease transaction which is not a ―sale and leaseback
transaction. In other words, in a direct lease, the lessee and the owner are two different entities. A
direct lease can be of two types: Bipartite Lease and Tripartite Lease.
Bipartite Lease: In a bipartite lease, there are two parties to the transaction – the equipment
supplier cum-lessor and the lessee. The bipartite lease is typically structured as an operating
lease with in-built facilities like up gradation of the equipment (upgrade lease) or additions
to the original equipment configuration. The lessor undertakes to maintain the equipment
and even replaces the equipment that is in need of major repair with similar equipment in
working condition (swap lease). Of course, all these add-ons to the basic lease arrangement
are possible only if the lessor happens to be a manufacturer or a dealer in the class of
equipment covered by the lease.

Tripartite Lease: A tripartite lease on the other hand is a transaction involving three
different parties -the equipment supplier, the lessor, and the lessee. Most of the equipment
lease transactions fall under this category. An innovative variant of the tripartite lease is
the sales-aid lease where the equipment supplier catalyzes the lease transaction. In other
words, he arranges for lease finance for a prospective customer who is short on liquidity.
Sales-aid leasing can take one of the following forms:
a) The equipment supplier can provide a reference about the customer to the leasing company.
b) The equipment supplier can negotiate the terms of the lease with the customer and complete
the necessary paper work on behalf of the leasing company.
c) The supplier can write the lease on his own account and discount the lease receivables with
the designated leasing company.
d) The effect of the transaction is that the leasing company owns the equipment and obtains
an assignment of the lease rental. By and large, sales-aid lease is supported by recourse to
the supplier in the event of default by the lessee. The recourse can be in the form of the
supplier offering to buy back the equipment from the lessor in the event of default by the
lessee or in the form of providing a guarantee on behalf of the lessee.

Domestic Lease and International Lease:

Domestic Lease: A lease transaction is classified as domestic if all parties to the agreement,
namely, equipment supplier, lessor and the lessee, are domiciled in the same country.

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International Lease: If the parties to the lease transaction are domiciled in different countries, it
is known as international lease. This type of lease is further sub classified into import lease and
cross-border lease.

Differences between Finance and Operating Leases:

Financial Lease Operating Lease

Risks and rewards of ownership are Economic ownership with all corresponding
transferred to, and borne by, the lessee. This rights and responsibilities are borne by the
includes the risks of accidental ruin or lessor. The lessor buys insurance and
damage of the asset (although these risks undertake responsibility for maintenance.
may be insured or otherwise assigned). Thus,
damage that renders an asset unusable does
not exempt the lessee from financial
liabilities before the lessor.
The goal of the lessee is either to acquire the The goal of the lessee is usage of the leased
asset or at least use the asset for most of its asset for a specific temporary need, and
economic life. As such, the lessee will aim to hence the operating lease contract covers
cover all or most of the full cost of the asset only the short-term use of the asset. Further,
during the lease term and therefore is likely the duration of an operating lease is usually
to assume the title for the asset at the end of much shorter than the useful life of the asset.
the lease term. The lessee may gain the title
for the asset earlier, but not before the full
cost of the asset has been paid off.
The lessor retains legal ownership for the It is not the lessee‘s intention to acquire the
duration of the lease term, though the lessee asset, and lease payments are determined
may or may not buy out the leased asset at accordingly. In addition, an asset under an
the end of the lease, with the lessor charging operating lease may subsequently be rented
only a nominal fee for the transfer of asset to out.
the lessee.
The lessee chooses the supplier of the asset The present value of all lease payments is
and applies to the lessor for funding. This is significantly less than the full asset price.
significant because the leasing company that
funds the transaction should not be liable for
the asset quality, technical characteristics,
and completeness, even though it retains the
legal ownership of the asset. The lessee will
also generally retain some rights with respect
to the supplier, as if it had purchase asset
directly.

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How to Calculate Leasing Accurately

Calculating leasing hinges on understanding two pivotal figures: the lease payments and the lease
term. The general principle is to determine the present value of the total lease payments, split over the
lease term. Most leases are paid in equal instalments, simplifying the calculation. To ascertain the
value of a lease, it's crucial to consider variables like the set lease period (N), expected lease payments
at different intervals (Pmt), and the lessee's incremental borrowing rate (r). The present value (PV) of
the lease payments can be calculated by the formula:
𝑃𝑉=∑𝑡=1𝑁𝑃𝑚𝑡(1+𝑟)𝑡

In essence, this formula discounts all future lease payments back to present value using the
incremental borrowing rate. It can be counterintuitive, but remember, a pound today is worth more
than a pound tomorrow due to investment potentials.

Understanding the Components of a Lease Agreement

A lease agreement is a pivotal document that delineates the terms and conditions of the lease. Some
main components of a lease agreement include:
Identification of Parties: The lease agreement must clearly define who the lessor (the party who
owns the asset) and the lessee (the party who will be using the asset) are.
Description of the Leased Asset: The leased asset's details, like make, model, dimensions, or, in
case of property, the address, must be explicitly mentioned to avoid any ambiguity.
Lease Term: The span of time the asset is to be leased out is clearly outlined, including the start and
end dates.
Rent Payment Details: The agreement should define the amount of rent to be paid, the due dates,
and the mode of payment.
Maintenance and Repair: Clear guidelines regarding who is responsible for the maintenance and
potential repair of the asset should be highlighted.
Insurance: The agreement must detail who will be bearing the insurance costs and to what extent.
Options: Any options, such as renewals or the option to purchase the asset at the end of the lease
term, should be outlined in the agreement.
Understanding these components is the key to entering and managing lease agreements that serve
your best interests. Every clause of a lease agreement can have financial and operational implications,
making a thorough understanding crucial for effective decision-making. Remember, leasing is a
strategic resource management tool. Depending on your business's objectives, availability of
resources, and specific operational needs, making effective use of leases can positively impact your
business growth and profitability.

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Practical Aspects of Leasing
Entering into a leasing agreement is not a decision to be taken lightly. It requires careful thought and
thorough planning as it will have financial implications for your business. As well as considering the
cost, you must also think about how the agreement aligns with your business strategy and what risks
and opportunities it presents.
Step-by-Step Guide to Negotiating a Lease Agreement
The negotiating process is a crucial part of the leasing journey. It starts with understanding what your
business really needs and finding a suitable lease offer. Here's an ordered list detailing the steps:

1. Clarify your needs: Clearly articulate your business needs. This includes the type of asset,
its specifications, and the required lease duration. Consider all possibilities, including
capacity, usage rates, technological changes, and possible upgrade needs over the lease term.
2. Do your research: Research potential lessors and their offerings. Look at their financial
stability, reputation, and customer service. Check out customer reviews on third-party
websites and consult other businesses who lease from them.
3. Review the agreement: Thoroughly read the lease agreement. It should outline the rights and
responsibilities of both parties, detail the terms and conditions, and include remedies for
disputes. Check for sudden rent increases, penalties, or unusual clauses.
4. Negotiate the terms: Even if you're presented with a standard lease contract, remember that
these terms can often be negotiated. Address problematic clauses, attain flexibility, and secure
your interest. Common areas of negotiation are rent amount, lease length, and termination
terms.
5. Get expert advice: Seek professional expertise. Lawyers, accountants, and finance
professionals can provide valuable insights during negotiation. A small investment made in
expert advice can prevent costly mistakes and secure a lease that better suits your business.
6. Close the deal: Once you're satisfied with the agreement, sign it to seal the deal. Keep a copy
of the signed agreement for future reference.

Don't rush the process. A thoughtful and calculated approach to negotiating a lease agreement can
provide a significant boost to your business operations and bottom line.

Successful Management of Corporate Leasing and Sub Leasing

Leasing and sub-leasing activities can become complex, particularly if your business has a large
portfolio of lease agreements to manage. Successful management can lead to cost savings and
improved efficiency. Lease Management: Managing corporate leasing effectively involves:

• Centralizing leasing data: It's critical to have all leasing data in a centralised location, where
it is easily accessible. This includes lease terms, payment schedules, renewal dates, and any
other relevant details.
• Regular monitoring: Lease agreements must be regularly reviewed and monitored to track
upcoming renewal dates or rent increases. Any non-compliance issues must be addressed
proactively to avoid penalties.

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 • Optimisation: Look for opportunities to optimise leasing costs. For example, this could
include renegotiating terms, consolidating leases or exploring alternatives.
Sub-Lease Management: Sub-leasing, or leasing a part or whole of a leased asset to a third party,
can be tricky. Successful sub-lease management involves:

• Securing consent: Before sub-leasing the leased property, obtain consent from the lessor, lest
you violate the terms of your primary lease.
• Setting clear terms: The scope, obligations, responsibilities, and restrictions related to the
sublease should be clearly agreed upon and articulated in the sublease agreement.
• Monitoring sub-lease agreements: Monitor the performance of sub-lease agreements to
ensure that sub-lessees comply with their terms. Sub-lease agreement defaults could impact
the primary lease.
Through careful attention to detail and rigorous processes, both leasing and sub-leasing can be
managed effectively, contributing significantly to your business' success. Remember, the key to
successful leasing management lies in understanding the terms and conditions, regularly reviewing
and monitoring agreements, and acting proactively to optimise leasing costs and compliance.

Leasing - Key takeaways

• Leasing definition in finance refers to a contract agreement in which one party (lessor) allows
another party (lessee) to use an asset over a specific period, without transfering ownership.
Key asset categories for leasing include property and expensive machinery.
• Corporate leasing is when a corporation acts as the lessee and uses the leased asset in its
operations. On the other hand, Subleasing involves the original lessee (corporation) leasing
the asset from the lessor to a third party (sub-lessee).
• Two types of lease financing are Operating Lease and Financial Lease. Operating Lease lets
the lessee use the asset with the ownership remaining with the lessor. Financial Lease involves
a contractual arrangement where the risks and rewards of asset ownership nearly entirely
transfer to the lessee.
• Some of the advantages of leasing include reduced initial expense, flexible terms, hassle-free
maintenance, and easier upgrades. However, its disadvantages comprise of higher total cost,
lack of ownership, and potential additional costs.
• The formula, 𝑃𝑉=∑𝑡=1𝑁𝑃𝑚𝑡(1+𝑟)𝑡, is used to calculate leasing accurately by determining
present value (PV) of total lease payments paid over the lease term (N), considering the
expected lease payments (Pmt) at different intervals and the lessee's incremental borrowing
rate (r).
Leases scope overview
A leasing arrangement conveys the use of an asset from one party to another without transferring
ownership. The leasing arrangement may take various forms. Some arrangements are clearly
within the scope of lease accounting, for example, a legal form lease that provides an explicit
contractual right to use a building for a specified period of time in exchange for consideration.
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However, the right to use an asset can also be conveyed through arrangements that are not leases
in legal form. For example, a hospital may execute an arrangement to purchase consumables and
services from a vendor through an arrangement that entitles the hospital to receive free medical
equipment for a period of time. Although not a lease in legal form, the rights to the medical
equipment may be within the scope of lease accounting.
ASC 842, Leases, identifies arrangements that are to be accounted for as leases. This chapter
discusses how to identify which arrangements, or components within an arrangement, should be
accounted for under ASC 842. ASC 842 specifically excludes arrangements for the right to use a
natural resource and arrangements that transfer the right to use certain assets other than property,
plant, or equipment from its scope. See LG 2.2 for additional information on the scope of ASC
842.
This chapter also discusses how to identify the components to be evaluated for lease accounting
and how to differentiate the lease and nonlease components.
Arrangements with a special purpose entity that contain a lease may require the lessee to
consolidate the special purpose entity under the variable interest entity model. See CG 2 for
additional information.
How Do Leasing Companies Make Money?
No matter what financial or lending product an organisation chooses, a fee or cost will be involved.
Whether it’s for establishing a loan or paying interest, companies must explore the finance options
available to them and ensure the fees they’re paying are justified. Leasing
companies differentiative themselves by structuring revenue models that ensure the finance
agreements (leases) are mutually beneficial — a stark difference to the traditional CAPEX
ownership model where the financing of the asset and its use typically aren’t linked to optimise
outcomes for both parties. To demystify the leasing process, this article explains how leasing
companies make their money and demonstrates how the right leasing and asset finance provider
helps companies optimise their asset management.

Leasing companies have multiple revenue streams

Leasing companies with operating lease models make money through three streams: lease
establishment fees, re-selling returned assets on the secondary market, and extended lease
payments. A lessor invests upfront in the devices they lease back to customers, and they legally
own them. Due to this investment, and the lessee’s ability to secure favourable funding
rates through their relationship with a variety of different funders, this enables lessors to secure
assets at advantageous rates. These rates are then passed onto customers through cheaper monthly
lease payments that pay off the total cost of the devices.
Lessors can charge a small establishment fee to set up a lease contract. However, the majority of
the revenue that leasing companies generate is through on-selling the ex-lease devices from their
customer (once they are returned) in a secondary market at current market value.
On-selling ex-lease assets requires diligent market analysis and asset evaluation to ensure the
lessor sets competitive lease rates for the devices, while projecting the future asset values

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accurately at the start of the lease term (which could be three to four years in advance of the devices
being sold). This is called the residual value.
If the lessee wishes to extend their lease beyond the original lease term, they can often do so by
re-negotiating extended lease payments with the lessor. These new payments will take into account
the fact that the residual value of the assets is getting lower as the assets get older, resulting in a
lower sale price at the end of the lease when the customer returns them. Alternatively, the customer
can negotiate a fair market value price to buy the devices outright from the lessor instead of
returning them.

Background of Leasing in Bangladesh:

Lease financing was first introduced in Bangladesh in the early 1980s. Industrial Development
Leasing Company of Bangladesh Ltd. (IDLC), the first leasing company of the country, was
established in 1986 under the regulatory framework of Bangladesh Bank. It was a joint venture of
the Industrial Promotion and Development Company of Bangladesh Ltd. (IPDC), the International
Finance Corporation, and the Korea Development Leasing Corporation. Another leasing firm, the
UNITED LEASING COMPANY Ltd. started its operations in 1989. The number of leasing
companies grew quickly after 1994 and, by the year 2000, rose to 16. The leasing business became
competitive with the increase in the number of companies and wider market share distribution.
However, 6 other companies are conducting leasing business in the country, although they do not
use the word leasing in their names. In terms of monetary value, the leasing business in Bangladesh
increased from Tk 41.44 million in 1988 to Tk 3.16 billion in 2000.

Currently, there are about 25 leasing companies operating in Bangladesh. Among them, only one
of them, Infrastructure Development Company Limited (IDCOL) is government owned and the rest
of them are privately owned companies.
1. Infrastructure Development Company Limited (IDCOL)
2. IDLC Finance Limited
3. Union Capital Ltd.
4. Bay Leasing & Investment Ltd
5. GSP Finance Co. (Bangladesh) Ltd.
6. FAS Finance & Investment Ltd.
7. LankaBangla Fiance [Link] Leasing Co. Ltd.
9. Prime Finance & Investment Ltd.
10. People’sLeasing & Financial Services Ltd.
11. National Housing Finance & Investment Ltd.
12. MIDAS Financing Ltd.
13. First Lease international Ltd.
14. Bangladesh Finance & Investment Ltd.
15. Saudi-Bangladesh Industrial and Agricultural Investment Co. Ltd.
16. The UAE-Bangladesh Development Co. Ltd.
17. United Leasing Co. Ltd.
18. Industrial Development Leasing Co. of Bangladesh.
19. Uttara Finance & Investment Ltd.
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20. International Leasing & Investment Ltd.
21. Bahrain Bangladesh Finance & Investment Co. Ltd.
22. Delta BRAC Housing Finance Corporation Ltd.
23. Vanik Bangladesh Ltd.
24. Bangladesh Industrial Finance Co. Ltd.
25. Industrial Promotion and Development Co. of Bangladesh (IPDC)
[source: [Link]
BANGLADESH-Currently-there-are-about-25-leasing/]

Lease financing, as organized in Bangladesh, operates with the following objectives:

(a) to assist the development and promotion of productive enterprises by providing
equipment lease financing and related services;
(b) to assist in balancing, modernization, replacement, and expansion of existing
enterprises;
(c) to extend financial support to small and medium scale enterprises;
(d) to provide finance for various agriculture equipment; and
(e) to activate the capital market by operating as managers to the issue, underwriters, or
portfolio managers.
The functions of a lease business include lease financing, short-term financing, house-building
financing, merchant banking and corporate financing. In this last group of functions, the leasing
business in Bangladesh moved away from regular leasing activities and is now involved in stock-
market-related activities such as issue management, underwriting, trust management, private
placement, portfolio management, and mutual fund operation. Broad capital market operations of
the lease financing institutions include bridge financing, corporate counseling, mergers and
acquisition, capital restructuring, financial engineering, and lease syndication. Prominent sectors
of the economy that now receive lease financing services are textiles, apparel and accessories,
transport, construction and engineering, paper and printing, pharmaceuticals, food and beverage,
chemicals, agro-based industries, telecommunications, and leather and leather products.

Commercial banks and development finance institutions (DFIs) have been the traditional lending
institutions in Bangladesh. In fact, the concept of lease financing is a relatively new one in the
country. Initially, leasing companies had to adopt the role of educators to make Bangladeshi
entrepreneurs aware of the benefits of leasing. However, as DFIs demonstrated poor recovery and
fund recycling performances, leasing got the opportunity to develop as an alternative funding
source. A few other factors also contributed to the development of the leasing business in the
country. For example, commercial banks have been keener in providing trade financing and
FOREIGN EXCHANGE dealings rather than long-term loans because of the risks involved and
their longer gestation period. The selection of lease proposals is relatively free from extraneous
pressure and is subject to a quality-level appraisal. Under lease agreements in the private sector,
projects are sanctioned and implemented expeditiously, resulting in time and cost savings benefits.
Private leasing companies also attract clients by providing relatively better services. The down
payments in leasing are not high, and the gestation period is low. Also, in the case of lease
financing, incidental costs incurred in import clearing, installation, and commercial production are
capitalized, substantially reducing the initial investment.
Leasing companies, however, face some problems in conducting their business in the country. The
relatively slow growth of the demand side compared to the fast growth of the leasing business is

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one such problem. This leads many leasing companies to operate in partial capacity. The culture
of loan default that prevails in the country is also a deterrent. Leasing companies often find it
difficult to raise funds through short- or long-term borrowing from money and capital markets.
They are hard-pressed to deal with financial assets because of the present laws of the country,
which are also not fully enforceable.
The leasing business is gaining increased importance in the economy of Bangladesh with its
gradual transformation from an agrarian to an industrial one. The government periodically revises
the trade and industrial policy to create a liberal business environment both for domestic and
foreign investment. Increased investment in the energy sector, power, transport,
telecommunications, water and sanitation, and safe disposal of wastes is expected to bring further
opportunities for leasing industries.

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