STRATEGIC FINANCIAL
MANAGEMENT
NAME: ZUBAIR ALI
19S-MBA-NBS-07
SUBMITTED TO DR. ARIFA BANO TALPUR
DATE: 16/12/2020
OBJECTIVES
TO UNDERSTAND THE CONCEPT OF
LEASING
TO COMPREHEND THE BASICS OF
LEASING
TO DEFINE AND IDENTIFY TYPES OF
LEASING
THEME
“WHY OWN A COW WHEN THE MILK IS SO
CHEAP? ALL YOU REALLY NEED IS MILK
AND NOT THE COW.”
-BY DONALD B. GRANT
LEASE?
• A LEASE IS A COMMERCIAL ARRANGEMENT WHEREBY AN
EQUIPMENT OWNER OR MANUFACTURER CONVEYS THE
RIGHT TO USE THE EQUIPMENT IN RETURN FOR A RENTAL
• IN OTHER WORDS, LEASE IS A CONTRACT BETWEEN THE
OWNER OF AN ASSET (THE LESSOR) AND ITS USER (THE
LESSEE) FOR THE RIGHT TO USE THE ASSET DURING A
SPECIFIED PERIOD IN RETURN FOR A MUTUALLY AGREED
PERIODIC PAYMENT (THE LEASE RENTALS).
CONTINUES….
• FOR EXAMPLE, APARTMENTS, HOUSES, OFFICES,
AUTOMOBILES, ETC.
ICAP
• A LEASE IS AN AGREEMENT WHEREBY THE LESSOR
CONVEYS
TO THE LESSEE, IN RETURN FOR RENT, THE RIGHT TO USE AN
ASSET FOR AN AGREED PERIOD OF TIME.
• LESSOR IS A PERSON WHO CONVEYS TO THE
ANOTHER
PERSON (LESSEE) THE RIGHT TO USE AN ASSET IN
CONSIDERATION OF A PAYMENT OF PERIODIC RENTAL, UNDER
A LEASE AGREEMENT. LESSEE IS A PERSON WHO OBTAINS
FROM THE LESSOR, THE RIGHT TO USE THE ASSET FOR A
PERIODICAL RENTAL PAYMENT FOR AN AGREED PERIOD OF
TIME.”
CONTENTS OF LEASING
• CONTRACT SPECIFIES WHO MAINTAINS THE ASSET
1.
2.
FULL-SERVICE LEASE -- LESSOR PAYS MAINTENANCE
NET LEASE -- LESSEE PAYS MAINTENANCE COSTS
• CANCELLABLE OR NON CANCELLABLE
1.
2.
OPERATING LEASE (SHORT-TERM, CANCELABLE) VS.
FINANCIAL LEASE (LONGER-TERM, NONCANCELABLE)
• OPERATION AT EXPIRATION OF LEASE
1. TRANSFER OF OWNERSHIP
• THE PARTIES (TWO OR MORE), THE ASSET, THE TERM, THE
PERIOD, THE RENTAL , LEASING PROCESS
TYPES OF LEASE
FINANCIAL LEASE

LONG-TERM, NON-CANCELLABLE LEASE. THE ESSENTIAL
POINT OF FINANCIAL LEASE AGREEMENT IS THAT IT
CONTAINS A CONDITION WHEREBY THE LESSOR AGREES TO
TRANSFER THE TITLE FOR THE ASSET AT THE END OF THE
LEASE PERIOD AT A NOMINAL COST. AT LEASE IT MUST
GIVE AN OPTION TO THE LESSEE TO PURCHASE THE ASSET
AT THE EXPIRY OF THE LEASE.
Key elements in Financial Lease:
•
•
•
The lessor will purchase that asset;
The lessee will have use of that asset during the
lease;
The lessee will pay a series of rentals or
installments for the use of that asset;
OPERATING LEASE
•
•
•
AN OPERATING LEASE STANDS IN CONTRAST TO THE FINANCIAL
LEASE IN ALMOST ALL ASPECTS. THIS LEASE AGREEMENT GIVES
TO THE LESSEE ONLY A LIMITED RIGHT TO USE THE ASSET.
THE LESSOR IS RESPONSIBLE FOR THE UPKEEP AND MAINTENANCE
OF THE ASSET. ORDINARILY, OPERATING LEASES REQUIRE THE
LESSOR TO MAINTAIN AND SERVICE THE LEASED EQUIPMENT.
THE LESSEE IS NOT GIVEN ANY UPLIFT TO PURCHASE THE
ASSET AT THE END OF THE LEASE PERIOD.
Key elements in Operating Lease:
•
•
•
Normally the lease is for a short period;
Revocable at a short notice.
Operating lease which is short-term and where
the asset may be hired to several lessees.
For example: computers and office copying machine,
automobiles, trucks and aircrafts, are the primary types of
equipment involve in operating leases, mines, computers
hardware, trucks and automobiles are found suitable for
operating lease because the rate of obsolescence is very
high in this kind of assets.
SALES AND BACK LEASE
LEVERAGED LEASING
For example, popular for big-ticket assets such as aircraft, oil rigs,
and railway equipment, vehicles, etc.
DIRECT LEASING
•
The major types of direct lessor include:
manufacturers, finance companies, independent
lease
companies,
special
purpose
leasing
companies etc like - IBM leases computers and
Xerox leases copiers, etc.
ADVANTAGES
•
•
•
SAVING OF CAPITAL: LEASING COVERS THE FULL COST OF THE
EQUIPMENT USED IN THE BUSINESS BY PROVIDING 100% FINANCE. THE
LESSEE IS NOT TO PROVIDE OR PAY ANY MARGIN MONEY AS THERE IS NO
DOWN PAYMENT. IN THIS WAY THE SAVING IN CAPITAL OR FINANCIAL
RESOURCES CAN BE USED FOR OTHER PRODUCTIVE PURPOSES E.G.
PURCHASE OF INVENTORIES.
FLEXIBILITY AND CONVENIENCE: THE LEASE AGREEMENT CAN BE TAILORMADE IN RESPECT OF LEASE PERIOD AND LEASE RENTALS ACCORDING TO
THE CONVENIENCE AND REQUIREMENTS OF ALL LESSEES.
PLANNING CASH FLOWS: LEASING ENABLES THE LESSEE TO PLAN ITS CASH
FLOWS PROPERLY. THE RENTALS CAN BE PAID OUT OF THE CASH COMING
INTO THE BUSINESS FROM THE USE OF THE SAME ASSETS.
CONCLUSION
• GOOD REASONS
–TAXES MAY BE REDUCED BY LEASING.
–THE LEASE CONTRACT MAY REDUCE CERTAIN
TYPES OF UNCERTAINTY.
–TRANSACTIONS COSTS CAN BE HIGHER FOR
BUYING AN ASSET AND FINANCING IT WITH DEBT
OR EQUITY THAN FOR LEASING THE ASSET.
• BAD REASONS
–ACCOUNTING