12/18/2018 Different types of leases

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Different types of leases

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There are various types of leases like financial lease,

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operating, leveraged and non-leveraged, conveyance
type, Import, International lease etc.

Types of leases:

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Different types of Leasing

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1. Financial Lease
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Financial leasing is a contract involving payment over a longer period. It is a long-
term lease and the lessee will be paying much more than the cost of the property or
equipment to the lessor in the form of lease charges. It is irrevocable. In this type
of leasing the lessee has to bear all costs and the lessor does not render any service.

2. Operating Lease
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In an operating lease, the lessee uses the asset for a specific period. The lessor
Transfer of Ownership
bears the risk of obsolescence and incidental risks. There is an option to either
Specific Goods, Unasce
party to terminate the lease after giving notice. In this type of leasing Goods, on Approval

Advantages and Disadv

lessor bears all expenses Corporate Enterprises
lessor will not be able to realize the full cost of the asset
specialized services are provided by the lessor. Production Control | M
Objectives, Functions,
Advantages, Requireme
This kind of lease is preferred where the equipment is likely to suffer obsolescence.
Notes on Scrutiny of Expenses in
3. Leveraged and non-leveraged leases
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12/18/2018 Different types of leases

In leveraged and non-leveraged leases, the value of the asset leased may be of a
huge amount which may not be possible for the lessor to finance. So, the lessor
involves one more financier who will have charge over the leased asset.
Materiality in Auditing
Instances of Materiality
4. Conveyance type lease Auditor

In Conveyance type lease, the lease will be for a long-period with a clear intention
Notes on Information P
of conveying the ownership of title on the lessee. | 5 Important Stages

5. Sale and leaseback

In a sale and leaseback, a company owning the asset sells it to the lessor. The lessor
pays immediately for the asset but leases the asset to the seller. Thus, the seller of
the asset becomes the lessee. The asset remains with the seller who is a lessee but
the ownership is with the lessor who is the buyer. This arrangement is done so that
the selling company obtains finance for running the business along with with the
asset.

6. Full and non pay-out lease

A full pay-out lease is one in which the lessor recovers the full value of the leased
asset by way of leasing. In case of a non pay-out lease, the lessor leases out the
same asset over and over again.

7. Specialized service lease

The lessor or the owner of the asset is a specialist of the asset which he is leasing
out. He not only leases out but also gives specialized personal service to the lessee.
Examples are electronic goods, automobiles, air-conditioners, etc.

8. Net and non-net lease

In non-net lease, the lessor is in charge of maintenance insurance and other

incidental expenses. In a net lease, the lessor is not concerned with the above
maintenance expenditure. The lessor confines only to financial service.

9. Sales aid lease

In case, the lessor enters into any tie up arrangement with manufacturer for the
marketing, it is called sales aid lease.

10. Cross border lease

Lease across national frontiers are called cross border lease, Shipping, air service,
etc., will come under this category.

11. Tax oriented lease

Where the lease is not a loan on security but qualifies as a lease, it will be
considered a tax oriented lease.

12. Import Lease

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12/18/2018 Different types of leases

In an Import lease, the company providing equipment for lease may be located in a
foreign country but the lessor and the lessee may belong to the same country. The
equipment is more or less imported.

13. International lease

Here, the parties to the lease transactions may belong to different countries which
is almost similar to cross border lease.

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