Leasing is referred to as the contract between the owner of the asset and the user of the asset over a decided time period. The owner of the asset is called a lessor and the user of the asset is called lessee.
Under the leasing contract, the lessor permits the lessee to use the asset for a consideration that is called lease rental. The lessee is liable to pay the lessor the fixed amount of rental either at the beginning or at the end of the month, quarter or year for the agreed time period.
Leasing can be considered a practice of separating the ownership and the use of asset as two different economic activities. It provides the facility of using an asset without any ownership.
The rental and the payment timing of the lease are generally fixed. But considering the requirements of the lessee it may also be tailored. Depending on the payment modules of leasing, it may be of two types – up-fronted leases and back-ended leases.
In case of the up-fronted leases, lessees are asked to pay more rentals in the initial years and fewer rentals in the final years of the leasing contract. The concept of back-ended leases is just opposite to the concept of the up-fronted leases.
At the end of the leasing contract time period, the asset returns to the lessor, as he is the legal owner of the leased asset. Since lessor is the legal owner of the asset, the lessor demands the depreciation cost of the leased asset. In cases of the long-term leases, the lessees are generally offered an option to either buy or renew the leased property.
The leasing contract is also sometimes divided into two parts – primary lease and secondary lease. The primary leases offer for the cost and profit of the asset to be recovered through rentals for a time period of generally four to five years. The secondary lease then follows the primary lease on a lease rental that is nominal.
Interestingly, the lessor is the legal owner of the asset while it is the lessee who enjoys the returns and bears the risks on assets. The lessee is benefited if the leased asset returns profit while the lessee suffers when the asset fails to return.
Last Updated on : 27th June 2013