Question-1

A lease is a type of business agreement in which one party, who is often the owner of the asset that is being leased, grants the other party, who is typically the lessee, the right to use the asset in return for a monthly payment. This arrangement is known as a lease. During the course of the lease financing agreement, the asset is often made available for rental purposes. Within this sector, the term “Lesser” is used to refer to the owner of the assets being leased out. In this situation, the person who is granted possession of the asset is referred to as the Lessee. The amount of money that the lessee is obligated to pay to the lessor on a regular basis in exchange for the right to use the leased item is referred to as the “lease rental.”

The lease contract, which outlines the terms and conditions for the regulation of the leasing arrangements, has been signed. This means that the terms and conditions are now in place. When the time period covered by the lease has expired, the item in question is handed back to the person who originally owned it. It is possible that this investment will be used to broaden the product offerings of the company or to improve the technological skills of the organization. The use of leasing as a form of financing can be an alternative for companies that are dependent on the quick development of new technological advancements. The lessee is responsible for evaluating and comparing the expenses connected with buying the asset with the costs that are associated with leasing the item before entering into lease finance.

Types of Lease There may be two types of lease financing. These may be finance lease and operating lease. Let us learn them in detail. 

1. a) Finance Lease: The lessee is accountable for the bulk of the ownership obligations and advantages associated with the assets for the period of the lease. These responsibilities and perks come with the assets. The lessee is placed in the same position that they would have been in had they purchased the thing rather than leasing it, which is the same position that they would have been in had they leased it. The finance lease agreement may be broken down into two distinct stages. The primary phase is the one that comes first in the process. The first phase is always considered to be the “non-cancellable phase.” Through the collection of rent from the lessee, the lessor is able to recuperate the initial investment he made in the property. There is a chance that the primary phase will continue on for an uncountably huge amount of time. When compared to the monthly lease payment for the primary period, the monthly lease payment for the secondary term is much more affordable.

Features of Finance Lease 

1) In the lease financing, the Lessee gets a right to use an asset.

2) The Lessor charges lease rent during the primary period of lease. The amount of the lease rent may recover the investment. 

3) The amount of lease rent for secondary period is less. 

4) The maintenance of asset is done by the Lessee. 

5) The Lessor do not take the risk and reward related to asset. 

6) The investment of Lessor is ensured because the lease is noncancellable.

1. b) Operating Lease: An operational lease is another name for a lease that does not include any finance whatsoever. In the event of an operational lease, the lessor does not transfer to the lessee any of the risks or advantages that are often associated with ownership of the leased asset. This is because the lessor does not consider the leased asset to be the lessee’s legal responsibility. A lease of this type often has a duration that is much shorter than the asset’s anticipated economic lifetime. It is conceivable that the Lessee will not be able to repay the whole investment through lease rental throughout the primary period of the lease. This possibility exists since the primary term is longer than the initial term. The Lessee can, in most circumstances, anticipate receiving direction from the Lessor on the repair, maintenance, and technical know-how that is associated with the leased asset. As a consequence of this, the terms “operation lease” and “service lease” can be utilized interchangeably in the same context.

Features of Operating Lease 

1) The term of lease is less than the economic life of the asset. 

2) The Lessee can terminate the lease at a short notice. The penalty is not charged for termination. 

3) The technical know how is provided by the Lessor. 

4) The Lessor bears the risks and rewards. 

5) Lessor gives leasing an asset to different Lessee. The leasing facilitates recovery of investment.