How the Lease Is Used as a Financing Vehicle - Assignment Example

How the Lease Is Used as a Financing Vehicle Lease is a contract which binds owner and tent in an agreement. Agreement has some specified terms and conditions, which both have to follow. The two foremost conditions include rental time period and condition in which renter have to return it. Penalties are also of agreement. Penalty includes late payment, damage to owner property and many others. The time period of lease can be a day and extended to weeks, months or year; solely depend on the agreement signed by owner and a renter. Agreement time period for vehicles is mostly seems to be two years (Henning & Lawrence, 2009). Agreement between owner and a tent defend future problems. Agreement obligates the renter to give payments within specified time period. Otherwise the specified action written in agreement is taken by the required person. Rental condition cannot be changed until and unless the specified lease period has expired. The method of leasing a car is mostly done by a financier. Financier can be a banker, investor or a person who is sponsoring you for a lease of car. Financier act as a representative of a customer, buy a vehicle for him. After that customer leases that vehicle from his representative and obliged to pay a specified lease for a month. When the agreement is going to end, customer can give the final installment of a lease and become an owner of that car. Customer can also plan for re-financing and renew the lease. He can also trade the car. Car leasing has multiple benefits. Range of contract term starts from two years (minimum time period) and ended on five years. Interest rate must remain fixed throughout the specified period of lease according to agreement. Lease rent is also fixed. Specified payment mention in agreement is done in advance. Customer must mention the purpose of renting a car. It the car is use for business purpose then specified tax mention by the government is paid by customer. GST is included in car price and can be claimed by the financier. Lease payments done in advance are for cash flow and tax deduction (Henning & Lawrence, 2009). The activity of leasing a car is mostly appropriate for partnership, companies, sole traders as well as individuals, who can’t afford to purchase a car in one go. The usage of leased vehicle is mostly done for producing income including business activities. A suitable package for employees as well, can give fees out of it. Capital Lease Duration of capital lease is a long term one. Items include under this lease are machinery. Technologic related like computers and other are not consider under this. The consumer gets the benefit as well as drawback in the form of ownership. This asset is also devalued in future, a major drawback in capital lease. This lease is categorized as a lease of dues (Brook, 2009). There are several conditions which should be met after leasing an assist. Any one of the condition must be fulfill before leasing. Conditions are Equipment title must be forward involuntarily to the consumer of an asset, before the lease term mention in the agreement is ended. The option to purchase an asset after the deadline of an agreement should be mention clearly in the agreement made before leasing an asset. The market value of a product must be fair one, it can be a purchase of 1$ or more than that. Lease term must be greater than 75 percent of the life of asset which is useful. This percentage is considered with economic point of view (Brook, 2009). The existing value of payments come under lease must be larger than 90 percent of the total. This value is the must be a fair market one of an asset. Operating Leases This is also known as service lease. The time period define under this lease is a short one. The assets come under this lease are high technological product. These products are equipment used in offices and organizations, for example computers (Henning & Lawrence, 2009). The customer can use the asset but the benefits and losses related to the asset directly affect the owner not the consumer. So consumer can never take out benefit from it. Rental cost related with operating lease is measured as an expense and come under the category of operating expense. Let’s compare both of them and which is better. But it solely depends on the asset which we are taking for lease. If the asset is computer, technology based one. These come under operating lease. Printer for a business use falls under operating lease. In the case of machinery, as electric appliance and willing to use for a long time in this case capital lease is considered. So both of them are better according to the situation or an asset you are willing to use as a lease product. How are leases accounted for within the firm’s financial reports: First of all we have to identify the type of lease; either it is capital lease or operating lease. This identification is an opinion given by renter as an operating leases or financial one. Owner gets the benefits and also has to face the risks assign with ownership of object which is leased. Agreement for lease is categorize as capital and operating lease. In the end of lease contract renter gets the ownership of a property or an assets in interchange for price. Price must be equal to payments made during the time period of a lease. In agreement of a lease there is a promise to sell the asset when the required time period of an agreement is expired. Bargain can also perform during this sell and purchase period and price is expected lower than the present value of asset. Term of a lease is 75 percent or might be greater. This price is an estimated life of asset which is leased and done in the definition of economics. But this situation does not apply if the economic estimated lies within 25 percent of lifetime of a leased asset. Owner and renter can change the agreement, same as we change the lease classification. After changes is done in agreement than this termed as a new one. All the dates must be changed according to that. Rent is totally depends after considering the asset, agreement is not the only thing. The nature of a lease is mostly a long term one. The value should be paid if it is other than a land. In the condition if lease agreement is contains the condition of transfer the wrights of asset or promise to sell it to the consumer, asset is sold at the bargain price. In the case if above condition is not true than payment is done as written in lease agreement. This policy should consider as an identical one. Expense related to finance is charged on current income, its reduction, discount and other factors is calculated after considering the present minimum value of asset in market. Gross investment done during the leased is considered as an income with the status of unearned, which is paid in appropriate manner. Income earned during period of fiscal is considered when it is earned. Profit and loss is clearly identified during leased period. Depreciation should be avoided for leased objects when they are in lease term. Residual Value: The value of an asset is reduced as the time passes or when the agreement is ended. This value is known as residual value. In the term of leases it is considered in a different manner. According to the IFRS law related to leases, asset’s value must be remain same if the asset is in perfect condition as it is hand over to the customer. Value of an asset must be reviewed on annual basis. With the help of this activity the accurate price of an asset is calculated and the residual value is adjusted according to that. The major purpose for calculating residual values is to estimate the present price of an asset which is devalued, the percentage of devalued asset give a clear picture of the condition of an asset at the present moment. Residual value for different asset must be considered as a separate entity .Take an example of a lift. Lift is an asset having shorter life appliances. As compared with building construction which have a long time period residual value. Both the entities are considered separately. Companies solved these in a quiet easier manner. Residual value of immaterial asset has a zero value. This main reason behind is that the expired patents got no value and considered as a ZERO VALUE. The zero value concepts are less in physical assets. Many of the assets which are physical are hardly resalable, even if the specified amount or cost is associated with an asset. Disposal has no resale value in market (Whaley, 2008). In leased assets, residual value consider as an actual cost associated with an asset. It is also an asset having a fewer value of capital. Payments received in these leases assets excludes all the value which is related with interest. These situations faced during life time period of lease. The common practice which is mostly notice that the consumer are taking leased asset with the residual value condition. Treatment related to accounted one help us to decide if it is operating lease or finance one. It is quite difficult to evaluate the residual value. It is determined on the specific day when deal is finalized. This residual value is also given in lease kit, so you can compare and conclude if it is good deal or not. Interest rate is compared with national rate provided by Bank. Consider a person see an advertisement in newspaper for buying a product. The first thing comes in mind of the current prices of a same object. Executory Costs: Executory costs are performing an important role in field of accountant and reporting done during lease time period. Executory includes taxes, maintenance and insurances related with leased asset. Cost is given by consumer or owner of an asset; this solely depends on the time when agreement is written and in which manner. Both the benefits and loses of owner are associated with capital leases. Capital lease allows performing the transition of giving a payment is done in a direct manner (Stewart, et. al. 2009). Consider the example of FAS13 accounting sector. The executor cost is given by the owner to the renter. This amount is a separate from other bills and rents, as it is an excluded quantity. This rent is given before the issue of capitalization. This strategy is implementation and provides a clear picture. It helpful in understand the major difference between components related with service as compared with other (Stewart, et. al. 2009). This concept is still unclear. It is generalized that executor cost is aligned with the service component cost. Changes for maintenance purposes are done under each module and also considered as insured, as it is mostly insured in these conditions. Taxes hardly includes in such scenario. This is a responsibility of a Renter and owner to assess the route of payment. Done in the way that requirements mention for Recognition project as revenue one and it is continuous change too. Lease and service components must be separated in a clear manner so that no confusion remains and both act as a separate entity. The facility must be taken as a separate one. They are independently available for owner. Owner can do the transactions for leasing it outside (Stewart, et. al. 2009). In the case an entity is failed to differentiate between two major marketing concepts namely service components and lease components. This service is automatically considered and preferred as financially. As a financier we are considering the number is always right. If the whole amount of lease is disturb or change in a drastic manner including lease as well as service components, the change must be allocate in a proper manner. If this strategy fails than change is divided among two above specified component Capital lease consider as a non-issue. In also be considered for future references. This planning is sued for analyzing different service component ads well as execute component. These two terminologies are runs parallel while we move forward in executor cost management by owner or renter. References: Brook, J. (2009) Sales and Leases: Examples and Explanations, 5th Edition. Wolters Kluwer Law and Business Publishers. Henning, W. H. and Lawrence, W. H. (2009) Understanding Sales and Leases of goods. Lexis Law Publishing. Stewart, M. Warner, R. and Portman, J. (2009) Leases and Rental Agreements, 8th Edition. Nolo Publishers. Whaley, D. J. (2008) Problems and Material on the Sale and Lease of Goods. Aspen Publishers. Read More