ASSIGNMENT TOPIC LEASING
SUBMITTED TO SIR ATHAR KHAN
SUBMITTED BY MUHAMMAD DANISH MUJTABA FARRUKH ALI UQAILI IRFAN BHATTI AVEENASH
CLASS MBA REGULAR 3 YEARS SECTION-D
DEFINING LEASING: Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lessor is the owner of the assets. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed or an indefinite period of time (called the term of the lease). The consideration for the lease is called rent. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership Under normal circumstances, an owner of property is at liberty to do what they want with their property, including destroy it or hand over possession of the property to a tenant. However, if the owner has surrendered possession to another (ie the tenant) then any interference with the quiet enjoyment of the property by the tenant in lawful possession is unlawful. Similar principles apply to real property as well as to personal property, though the terminology would be different. Similar principles apply to sub-leasing, that is the leasing by a tenant in possession to a sub-tenant. The right to sub-lease can be expressly prohibited by the main lease. TYPES OF LEASING: There are different kinds of lease arrangement. It makes sense to look at each one to see which is best suited to your business, your particular circumstances and the asset that you are acquiring. The two main types of leasing are: 1. Finance lease. 2. Operating lease. 1. FINANCE LEASE: A finance lease is a full-payout, noncancellable agreement, in which the lessee is responsible for maintenance, taxes and insurance. Finance leases are most attractive in cases where the lessee wants the tax benefits of ownership or expects the equipment's residual value to be high. These leases are structured as equipment financing agreements with residuals up to 10 percent. The lessee purchases the equipment upon lease termination at a preagreed amount. The term of a finance lease tends to be longer, nearly covering the useful life of the equipment. 2. OPERATING LEASE: An operating lease is particularly attractive to companies that continually update or replace equipment and want to use equipment without ownership, but also want to return equipment at lease-end and avoid technological obsolescence. An operating lease usually results in the lowest payment of any financing alternative and is an excellent strategy for bypassing capital budgeting restraints. It typically qualifies for off-balance sheet treatment and can result in improved Return On Asset (ROA) due to a lower asset base. It can also result in higher reported earnings in the early years of the lease.
HISTORY OF LEASING IN PAKISTAN: With the development of Pakistan's economy during the past decade and the privatization, deregulation and other industrial policies of the Government of Pakistan, the economy received a boost after a prolonged period of sluggish economic activity over the '70s and '80s. The first leasing company was established in 1985. The growth of the leasing industry in Pakistan initially lacked momentum due mainly to a general lack of awareness regarding its nature and benefits. From 1985 to 1997, 32 leasing companies were incorporated with the minimum capital of Rs. 100 million. The minimum capital requirement was raised to Rs. 200.00 million by June 2000. This lead to mergers and acquisitions, thereby the number of leasing companies is reduced to 27. In addition Nine leasing Modarabas & 3 Investment Banks are actively involved in leasing business. In the mid-nineties annual average growth was in the range of 30 - 35 percent. The real growth in the leasing came in the period 1992 - 95, when over 20 leasing companies were set up. In October 1995, leasing companies' paid-up capital was Rs.7.572 billion, with market capitalization of Rs.6.0 billion as on 30-06-2002. Leasing is not a very old phenomenon in Pakistan, but has gained acceptance very rapidly. The reasons are: growing awareness, ease in obtaining the facility compared to conventional forms of financing (bank loans), inherent tax benefits, simple procedure and flexibility to cater to the needs of the customer. Profit is earned through the use of the asset, not the ownership. In leasing, the ownership is vested in the leasing company and in return for rental payments, the 'lessee' has virtually unrestricted use of the asset. Leasing is a medium to long term hire of assets. It effectively increases a company's total availability of capital and leaves other sources of funds available for more profitable usage. The leasing sector in general has experienced commendable growth over the years and has adequately proved to be an alternative source of finance. In case of an expected economic revival, the overall Leasing Sector is likely to regain its initial momentum particularly in the backdrop of Islamization of the economy effective fiscal year 2002 - 2003 due to its inherent potential of being in close conformity to one of the permissible modes of financing under Shariah. However, in order to improve the near future demand prospects of Leasing Sector in particular, the leasing companies need to develop innovative products along with encouraging leasing of plant, machinery and equipment relating to priority sectors of the economy including energy (CNG), IT (Computer hardware, software and accessories), textiles, engineering etc subject to their intrinsic value. Agriculture sector is receiving special focus. The presence of commercial banks and DFI's in the lease market has impacted the leasing company's margin, but their capability of offering large ticket leasing has enhanced the acceptability of leasing options.
CONSOLIDATED STATISTICS / OVERVIEW OF LEASING SECTOR IN PAKISTAN
2006
2007
2008
29
27
25
12,185
13,182
17,448
8,599
7,877
8,477
Total Equity
20,784
21,059
25,925
Investment in Lease Finance
75,151
72,908
71,597
Investments
21,687
22,817
29,896
Borrowings
78,882
83,196
90,792
Revenues
14,665
15,028
16,907
Operating Expenditure
5,009
5,822
5,779
Financial Charges
7,419
8,467
8,954
193
91
411
2,044
636
2,094
900
961
884
123,501
128,315
136,569
No. of Companies Paid up Captial Reserves
Taxation Net Profit Cash Divident Total Assets
TREATMENT OF LEASING IN THE FINANCIAL STATEMENTS ACCORDING TO IAS 17
1. LEASES IN THE FINANCIAL STATEMENTS OF LESSEE : a) OPERATING LEASES :
Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit. b) FINANCE LEASES:
At the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognized as an asset. Minimum lease payments shall be apportioned between the finance charge and the reduction of the outstanding liability. The finance charge shall be allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents shall be charged as expenses in the periods in which they are incurred. A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period. The depreciation policy for depreciable leased assets shall be consistent with that for depreciable assets that are owned, and the depreciation recognised shall be calculated in accordance with IAS 16 Property, Plant and Equipment and IAS 38 Intangible Asset s. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life. 2. LEASES IN THE FINANCIAL STATEMENTS OF LESSOR : a) OPERATING LEASES :
Lessors shall present assets subject to operating leases in their balance sheets according to the nature of the asset. The depreciation policy for depreciable leased assets shall be consistent with the lessor’s normal depreciation policy for similar assets, and depreciation shall be calculated in accordance with IAS 16 and IAS 38. Lease income from
operating leases shall be recognized in income on a straightline basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.
b) FINANCE LEASES:
Lessors shall recognise assets held under a finance lease in their balance sheets and present them as a receivable at an amount equal to the net investment in the lease. The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease. Manufacturer or dealer lessors shall recognise selling profit or loss in the period, in accordance with the policy followed by the entity for outright sales. If artificially low rates of interest are quoted, selling profit shall be restricted to that which would apply if a market rate of interest were charged. Costs incurred by manufacturer or dealer lessors in connection with negotiating and arranging a lease shall be recognised as an expense when the selling profit is recognised. 3. SALE AND LEASEBACK TRANSACTIONS :
A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. The lease payment and the sale price are usually interdependent because they are negotiated as a package. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved.
SAMPLE LEASE OR RENTALAGREEMENT
By this agreement made at ___________________________________, PA on the __________ day of _______________________, 20____, the Landlord ___________ _______________________________ and the Tenant _________________________ _______________________ agree as follows:
1. PROPERTY
The landlord hereby leases to Tenant for the term of this agreement a. the property located at: ___________ __________________________ __________________________ No. Street Name Unit No. _____________________________________________________________________ City State Zip And b. the following furniture and appliances on that property: _____________________________________________________________________ _____________________________________________________________________ ____________________________ 2. TERM
The term of this lease is for ____________, beginning on ____________, and ending on __________. At the expiration of said term, the lease will automatically be renewed for a period of one month unless either party notifies the other of its intention to terminate the lease at least one month before its expiration date. (or) At the expiration of said term, the lease will expire unless the tenant gives a written notice at least 15 days before the termination date of the lease. Thereafter, the lease will automatically be renewed for periods of one month until either party notifies the
other of its intention to terminate the lease. The notice of termination will be in writing and will be effective on the next rental date no less than 30 days after the date of the notice. 3. RENT
Tenant agrees to pay rent in the amount of __________ per month, each payment due on the _________ day of each month and to be made at: _____________________________________________________________________ Address City State Zip
4. UTILITIES/SERVICES
Landlord agrees to provide the utilities and services indicated: __________ electricity __________ gas __________ water __________ garbage collection __________ snow removal __________ other 5. DEPOSIT
Tenant has paid a deposit of $__________ of which Landlord acknowledges receipt. Upon regaining possession of the property, Landlord shall refund to Tenant the total amount of the deposit less any damages to the property, normal wear and tear expected, and less any unpaid rent. 6. REFUND PROCEDURE
Forwarding Address—Tenant shall provide Landlord with a forwarding address at which the Landlord can send him/her the deposit refund. Landlord shall return the entire deposit to Tenant within 15 days after retaking possession; or shall return so much of the deposit as exceeds any damages done to the property during the Tenant’s residence, normal wear and tear expected, and any unpaid rent. If the Landlord returns any amount less than the full deposit, he/she shall also provide a written itemized list of damages and charges. Tenant maintains the right to sue Landlord for any portion of the deposit not returned to him/her which the tenant believes he/she is entitled. 7. INVENTORY CHECKLIST The Tenant is provided with an Inventory Move-In Checklist attached to this lease. The Tenant shall note the conditions of each item on the checklist and return a copy to the Landlord within 10 days after taking possessions. If the Landlord objects to inclusions of any item, he/she shall notify the Tenant in writing within 10 days. The Tenant and Landlord shall note the condition of each item on the checklist after the Tenant returns possession to the Landlord and shall give a copy to the other party. The Landlord may not retain any portion of the Security Deposit for damages noted in the Move-Out Checklist to which the Landlord did not object. 8. THE PARTIES ALSO AGREE
A. Tenant shall not sublease nor assign the premises without the written consent of the Landlord (but this consent shall not be withheld unreasonably). B. The Landlord may not enter the premises without having given tenant at least 24 hours notice, except in case of emergency. Landlord may enter to inspect, repair, or show the premises to prospective buyers or tenants if notice is given. C. Tenant agrees to occupy the premises and shall keep the same good condition, and shall not make any alternations thereon without the written consent of the landlord. D. Landlord agrees to regularly maintain the building and grounds in a clean, orderly, and neat manner. Landlord further agrees not to maintain a public nuisance and not to conduct business or commercial activities on the premises. E. Tenant agrees not to use the premises in such a manner as to disturb the peace and quiet of other tenants in the building. Tenant further agrees not to maintain a public nuisance and not to conduct business or commercial activities on the premises. F. Tenant shall, upon termination of this Agreement, vacate and return the swelling in the same condition that it was received, less reasonable wear and tear, and other damages beyond the Tenant’s control. G. Any alternations to this Agreement shall be in writing and signed by all parties. We, the under-signed, agree to this Lease:
LANDLORD
TENANT _________________________
Signature Typed Name Address Signature Typed Name Address
_______________________ Signature
_________________________ Typed Name _________________________ Address _________________________ Signature _________________________ Typed Name _________________________ Address
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