Lease document ■ Terms of the lease ■ asset to be leased. a Payments-when and how much? Obligations of lessee and lessor -who pays for insurance. maintenance etc Whether lessee may acquire the asset at the end of the lease Cancellation provisions
Lease Document ◼ Terms of the lease. ◼ Asset to be leased. ◼ Payments - when and how much? ◼ Obligations of lessee and lessor - who pays for insurance, maintenance, etc. ◼ Whether lessee may acquire the asset at the end of the lease. ◼ Cancellation provisions
Types of leases Operating lease- short-term (5 ears or less ye The term of the lease is usually less than the economic life of the asset Financial lease- more long-term. The economic life of the asset and the term of the lease are approximately equal a Basic characteristics of each covered in text, pp 652-4
Types of Leases ◼ Operating lease - short-term (5 years or less). The term of the lease is usually less than the economic life of the asset. ◼ Financial lease - more long-term. The economic life of the asset and the term of the lease are approximately equal. ◼ Basic characteristics of each covered in text, pp. 652-4
Operating lease Risks and rewards rest with lessor a Generally cancellable at virtually no cost Sum of lease payments less than the initial cost to the lessor a may have a separate or inclusive maintenance contract whereby the lessor assumes responsibility for maintenance of the asset service or maintenance lease a Equipment reverts back to the lessor when lease is terminated
Operating Lease ◼ Risks and rewards rest with lessor. ◼ Generally cancellable at virtually no cost. ◼ Sum of lease payments less than the initial cost to the lessor. ◼ May have a separate or inclusive maintenance contract whereby the lessor assumes responsibility for maintenance of the asset - service or maintenance lease. ◼ Equipment reverts back to the lessor when lease is terminated
Finance lease a Lessee incurs most of the risks and enjoys most of the benefits a Lessee normally responsible for maintenance etc. Non-cancellable by either party. Sum of lease payments exceeds the value of the leased asset Lessee guarantees the residual value
Finance Lease ◼ Lessee incurs most of the risks and enjoys most of the benefits. ◼ Lessee normally responsible for maintenance, etc. ◼ Non-cancellable by either party. ◼ Sum of lease payments exceeds the value of the leased asset. ◼ Lessee guarantees the residual value
Residual value a An option for the lessee to purchase the asset cannot be explicitly provided for in the lease agreement a However, the lessee indemnifies the lessor for any loss resulting from the sale at the end of the lease term Usually through the lessee purchasing the asset for the original residual value(usually between 10%o and 40 of the original cost
Residual Value ◼ An option for the lessee to purchase the asset cannot be explicitly provided for in the lease agreement. ◼ However, the lessee indemnifies the lessor for any loss resulting from the sale at the end of the lease term. Usually through the lessee purchasing the asset for the original residual value (usually between 10% and 40% of the original cost)