1. Leasing – Regulatory framework
A lease is an arrangement vide which the
owner of an asset/equipment (lessor)
provides the asset for use to the user
(lessee) for an agreed period of time in
return for periodic payment of rental.

2. Essential elements of leasing –Parties
to the contract
• Two parties are participating to a contract of
lease transaction/agreement.
• These parties are owner and user.
• Both these parties are known as lessor
(owner) and lessee (User).
• Who may by lessor and lessee. For example:
• An individuals, partnerships, companies,
corporations or financial institutions.

3. Lessor and Lessee
• Lessor is the owner of the asset that is being
leased.
• Lessee is the receiver of the services of the asset
under a lease contract.
• In some of the lease contract, a lease financier is
also involved and provides refinances the lessor,
by extending term loans or subscribing to equity
or under a specific refinance scheme.

4. Asset, Property or Equipment
• The asset, property or equipment to be leased
is the subject-matter of a contract of lease
financing.
• Generally the asset be of the lessee’s choice
suitable for his business needs.
• The asset may be plant and machinery, land &
building, factory, automobile (2/4
wheeler), equipment, aircraft and others.

5. Ownership Separated from User
• During the contract period of the lease, the
ownership of the leased asset(s) remains
under the control of the lessor and its use is
allowed to the lessee.
• On the expiry of the lease contract – tenure,
the leased asset(s) reverts to the lessor.

6. Term of Lease
• The term of lease is the period for which the
agreement of lease remains in operation.
• Every lease should have a definite period and
in its absence it will be legally not operative.
• The lease tenure to be the expected entire
economic life of the asset (i.e.financial lease)
• Whenever lease period is shorter than the
useful life of the asset (i.e. operating lease)

7. Lease Rentals
The consideration which the lessee pays to the
lessor for the the lease transaction is the lease
rental.
The lease rentals are worked out/ structured as
to compensate the lessor for the investment
made in the asset which comprises of the interest
on the investment, depreciation, repairs, serving
charges and other expense is to be incurred by
the lessor during the lease period.

8. Modes of Terminating Lease
• Usually the lease is terminated at the end of
the lease period. However, the parties may
mutually agree to and choose any of the
alternatives at the time of preparation of lease
agreement: The lease is renewed on its expiry
• The asset reverts to the lessor, or
• The assets reverts to the lessor and the lessor
sells it to a third party, or
• The lessor sells the asset to the lessee.

9. Kinds of Lease
• Finance Lease is for terms that approach the
economic life of the asset; the total payments
over the term of the lease are in total more
than the lessor’s initial cost of the leased
asset.
• It involves payments of rentals over an
obligatory non-cancellable lease period, which
is enough in total to amortise the capital
outlay of the lessor and leave some profit.

10. • In such leases, the lessor is only a financier
and is usually not interested in the assets.
Therefore, such leases are also called as ‘full
payout leases’ as they enable a lessor to
recover his investment in the lease and derive
a profit. Types of assets under such lease, are
railway wagons, ships, aircrafts, lands,
buildings, generating sets, heavy machinery
and others.

11. Situations lead to a lease being
classified as a finance lease are:
• A. The lease transfers ownership of the asset to
the lessee by the end of the lease tenure;
• B. The lease term is for a major part of the
economic life of the asset.
• C. At the inception of the lease, the present value
of the minimum lease payments amounts to atleast substantially all of the fair value of the
leased asset;
• D. The leased asset is of a specialized natures
such that lessee can use it without major
modifications being made.

12. Operating Lease
• Operating lease is for a term shorter than the
economic life of the asset; generally the
payment over the term of the lease is less
than the lessor’s initial cost of the leased
asset. 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 amortised
during the primary lease period