Leasing - Financial vs. Operational
Leasing is not Leasing -
there is a big difference between financial and operational Leasing!
Leasing grew up since the booming 80’s of the last century increasingly as favourite financing solution for all kind consuming goods. But also
machinery was in the following more and more financed by leasing methods instead of simple loans. Leasing means by nature “rent” but in the
context of getting goods on credit it became the naturalized meaning of “buy on credit”. This is not always the case.
.
Financial Leasing
Financial Leasing is obviously the most common method for leasing. Thereby the leasing object is the property of the
lessee (party, who use the goods) and is activated in the assets of the balance sheet. On the day of the activation the
lessee enter a corresponding financing transaction in the liabilities of the balance sheet; i.e. he has a liability vs. the
lessor (party, who is granting a loan to the lessee). Financial leasing may be with or without residual amount. That
means, at the end of a leasing contract a resdiual value can be agreed - this leads during the leasing time that the
monthly installments are usually smaller.
Therfore the lessee is in the view of externals the holder and owner. But in most cases the the lessor requests a guarantee for his loan in form a
right of retention for the leased object or any other applicable surety.
In a firm’s financial statement the result of the leasing transaction is monitored as installement and expense, mostly combined as one part. This
result is part of financial part in the profit and loss statement. (Completely different is the operating lease, see below). The installments are
mostly decreasing but may be always the same during the lifetime of the lease contract - this is only a calculatory topic but has not impact on the
overall result. The risk of the leasing objects (damage, theft etc.) may be flexible, but usually they are beared by the lessee.
As last specification the often floating interest rate is highlighted. But it is also possible to arrange a fix interest rate for the whole lifetime of a lease
contract. Depending on the yield curve, the fix rate of mostly higher than a floating rate. But a floating rate may rise in the future, also above the fix
rate and is therefore exposed to interest movements of the market. 100% hedged at inception of the lease agreement, the fix rate equals the
hedged floating rate.
Even it agreed in the lease agreement that the lessor is owner of the lease object, all lease objects need to monitored as property of the
lessee and subsequenctly activted as an assets! This might be a problem at a first glance, because the same object cannot be property of both
parties at the same time. But it is no longer a (financial) problem if the fact of the same time liability of the lessee is taken into consideration.
Operational Leasing
This kind of leasing is a pure rent, in which the leasing object is the legal property only of the lessor. Hence, only the lessor activates the leasing
goods and the lessee is using it. Usually the lessee is fully responsible for the maintenance expenses and insurance of the leasing objects.
The installments are usually always the same during the lifetime and they are monitored in the operational part of lessees’ income statement;
same like for example rent for offices or warehouses. This important difference in comparison to the financial leasing need to be considered for
financial statements when the focus is on the operational result and the financial part is considered separately.
The lessee has at the end of the lease duration the choice whether he would take over the leasing objects or not. The final price shall be not
mentioned in the lease agreement and need to be part of the future market value of the lease object.
IFRS Specifications
IFRS has clear requirements on qualification of an operational lease. If just one of the follwoing points are not fulfilled, the lease is considered as
Finanancial Lease. regardless, whether the agreement says anything other.
Qualification Items for an Operational Lease according IFRS
If just only one of the following 9 questions can be answered with “yes”, the lease is a Financial Lease!
1.
Are all substantial risk are transferred to the lessee?
2.
Is the property automatical transferred to the lessee at the end of the leasing time?
3.
Is the duration of the leasing more than 75% of the depreciation time of the leasing object?
4.
Includes the agreement a purchase paragraph at the end of the leasing time whereas the lessee has no other choice than to buy?
5.
Is the present value of the lease installments more than 90% than the purchase price of the leasing object? That means, no residual value
was agreed who represents less then 10% of the purchasae price?
6.
Does the lessee needs to make significant changes at the leasing objects that he is able to use them?
7.
Exist agreements that losses of the lessor (other than insolvency) need to be borne by the lessee?
8.
Exist a „fair-value-guarantee“ in which the residual value is fixed?
9.
Is there a pragraph for a following agreement by which the rent is clear below the market rent?
These nine points reflect more or less law for rental objects, what is for example the same like usual rent for flats. Therefore it is understood that
operational lease is a clear a rent and not a purchase rent.
Summary
Wheter an object shall be leased or not depends on many items. For example, how should a lack of liquidity be avoided (or in case of too much
liquidity, how can this be invested better than in bonds and shares), what are the general accepted account policies (GAAP) of a company, does
the object shall be bought at the end or not etc.. These and more questions we can help you to answer; the result will have sustainable impact in
the follwoing years for you.
Contact us, we would be glad to show you the possible opportunities!
machinery was in the following more and more financed by leasing methods instead of simple loans. Leasing means by nature “rent” but in the
context of getting goods on credit it became the naturalized meaning of “buy on credit”. This is not always the case.
.
Financial Leasing
Financial Leasing is obviously the most common method for leasing. Thereby the leasing object is the property of the
lessee (party, who use the goods) and is activated in the assets of the balance sheet. On the day of the activation the
lessee enter a corresponding financing transaction in the liabilities of the balance sheet; i.e. he has a liability vs. the
lessor (party, who is granting a loan to the lessee). Financial leasing may be with or without residual amount. That
means, at the end of a leasing contract a resdiual value can be agreed - this leads during the leasing time that the
monthly installments are usually smaller.
Therfore the lessee is in the view of externals the holder and owner. But in most cases the the lessor requests a guarantee for his loan in form a
right of retention for the leased object or any other applicable surety.
In a firm’s financial statement the result of the leasing transaction is monitored as installement and expense, mostly combined as one part. This
result is part of financial part in the profit and loss statement. (Completely different is the operating lease, see below). The installments are
mostly decreasing but may be always the same during the lifetime of the lease contract - this is only a calculatory topic but has not impact on the
overall result. The risk of the leasing objects (damage, theft etc.) may be flexible, but usually they are beared by the lessee.
As last specification the often floating interest rate is highlighted. But it is also possible to arrange a fix interest rate for the whole lifetime of a lease
contract. Depending on the yield curve, the fix rate of mostly higher than a floating rate. But a floating rate may rise in the future, also above the fix
rate and is therefore exposed to interest movements of the market. 100% hedged at inception of the lease agreement, the fix rate equals the
hedged floating rate.
Even it agreed in the lease agreement that the lessor is owner of the lease object, all lease objects need to monitored as property of the
lessee and subsequenctly activted as an assets! This might be a problem at a first glance, because the same object cannot be property of both
parties at the same time. But it is no longer a (financial) problem if the fact of the same time liability of the lessee is taken into consideration.
Operational Leasing
This kind of leasing is a pure rent, in which the leasing object is the legal property only of the lessor. Hence, only the lessor activates the leasing
goods and the lessee is using it. Usually the lessee is fully responsible for the maintenance expenses and insurance of the leasing objects.
The installments are usually always the same during the lifetime and they are monitored in the operational part of lessees’ income statement;
same like for example rent for offices or warehouses. This important difference in comparison to the financial leasing need to be considered for
financial statements when the focus is on the operational result and the financial part is considered separately.
The lessee has at the end of the lease duration the choice whether he would take over the leasing objects or not. The final price shall be not
mentioned in the lease agreement and need to be part of the future market value of the lease object.
IFRS Specifications
IFRS has clear requirements on qualification of an operational lease. If just one of the follwoing points are not fulfilled, the lease is considered as
Finanancial Lease. regardless, whether the agreement says anything other.
Qualification Items for an Operational Lease according IFRS
If just only one of the following 9 questions can be answered with “yes”, the lease is a Financial Lease!
1.
Are all substantial risk are transferred to the lessee?
2.
Is the property automatical transferred to the lessee at the end of the leasing time?
3.
Is the duration of the leasing more than 75% of the depreciation time of the leasing object?
4.
Includes the agreement a purchase paragraph at the end of the leasing time whereas the lessee has no other choice than to buy?
5.
Is the present value of the lease installments more than 90% than the purchase price of the leasing object? That means, no residual value
was agreed who represents less then 10% of the purchasae price?
6.
Does the lessee needs to make significant changes at the leasing objects that he is able to use them?
7.
Exist agreements that losses of the lessor (other than insolvency) need to be borne by the lessee?
8.
Exist a „fair-value-guarantee“ in which the residual value is fixed?
9.
Is there a pragraph for a following agreement by which the rent is clear below the market rent?
These nine points reflect more or less law for rental objects, what is for example the same like usual rent for flats. Therefore it is understood that
operational lease is a clear a rent and not a purchase rent.
Summary
Wheter an object shall be leased or not depends on many items. For example, how should a lack of liquidity be avoided (or in case of too much
liquidity, how can this be invested better than in bonds and shares), what are the general accepted account policies (GAAP) of a company, does
the object shall be bought at the end or not etc.. These and more questions we can help you to answer; the result will have sustainable impact in
the follwoing years for you.
Contact us, we would be glad to show you the possible opportunities!
Leasing - Financial vs.
Operational
Leasing is not Leasing - there is a big difference between
financial and operational Leasing!
Leasing grew up since the booming 80’s of the last century
increasingly as favourite financing solution for all kind consuming
goods. But also machinery was in the following more and more
financed by leasing methods instead of simple loans. Leasing means
by nature “rent” but in the context of getting goods on credit it became
the naturalized meaning of “buy on credit”. This is not always the
case.
.
Financial Leasing
Financial Leasing is obviously the most
common method for leasing. Thereby the
leasing object is the property of the lessee
(party, who use the goods) and is activated in
the assets of the balance sheet. On the day
of the activation the lessee enter a corresponding financing
transaction in the liabilities of the balance sheet; i.e. he has a liability
vs. the lessor (party, who is granting a loan to the lessee). Financial
leasing may be with or without residual amount. That means, at the
end of a leasing contract a resdiual value can be agreed - this leads
during the leasing time that the monthly installments are usually
smaller.
Therfore the lessee is in the view of externals the holder and owner.
But in most cases the the lessor requests a guarantee for his loan in
form a right of retention for the leased object or any other applicable
surety.
In a firm’s financial statement the result of the leasing transaction is
monitored as installement and expense, mostly combined as one part.
This result is part of financial part in the profit and loss statement.
(Completely different is the operating lease, see below). The
installments are mostly decreasing but may be always the same
during the lifetime of the lease contract - this is only a calculatory topic
but has not impact on the overall result. The risk of the leasing objects
(damage, theft etc.) may be flexible, but usually they are beared by
the lessee.
As last specification the often floating interest rate is highlighted. But it
is also possible to arrange a fix interest rate for the whole lifetime of a
lease contract. Depending on the yield curve, the fix rate of mostly
higher than a floating rate. But a floating rate may rise in the future,
also above the fix rate and is therefore exposed to interest
movements of the market. 100% hedged at inception of the lease
agreement, the fix rate equals the hedged floating rate.
Even it agreed in the lease agreement that the lessor is owner of the
lease object, all lease objects need to monitored as property of
the lessee and subsequenctly activted as an assets! This might be a
problem at a first glance, because the same object cannot be property
of both parties at the same time. But it is no longer a (financial)
problem if the fact of the same time liability of the lessee is taken into
consideration.
Operational Leasing
This kind of leasing is a pure rent, in which the leasing object is the
legal property only of the lessor. Hence, only the lessor activates the
leasing goods and the lessee is using it. Usually the lessee is fully
responsible for the maintenance expenses and insurance of the
leasing objects.
The installments are usually always the same during the lifetime and
they are monitored in the operational part of lessees’ income
statement; same like for example rent for offices or warehouses. This
important difference in comparison to the financial leasing need to be
considered for financial statements when the focus is on the
operational result and the financial part is considered separately.
The lessee has at the end of the lease duration the choice whether he
would take over the leasing objects or not. The final price shall be not
mentioned in the lease agreement and need to be part of the future
market value of the lease object.
IFRS Specifications
IFRS has clear requirements on qualification of an operational lease.
If just one of the follwoing points are not fulfilled, the lease is
considered as Finanancial Lease. regardless, whether the agreement
says anything other.
Qualification Items for an Operational Lease according
IFRS
If just only one of the following 9 questions can be answered
with “yes”, the lease is a Financial Lease!
1.
Are all substantial risk are transferred to the lessee?
2.
Is the property automatical transferred to the lessee at the end
of the leasing time?
3.
Is the duration of the leasing more than 75% of the depreciation
time of the leasing object?
4.
Includes the agreement a purchase paragraph at the end of the
leasing time whereas the lessee has no other choice than to
buy?
5.
Is the present value of the lease installments more than 90%
than the purchase price of the leasing object? That means, no
residual value was agreed who represents less then 10% of the
purchasae price?
6.
Does the lessee needs to make significant changes at the
leasing objects that he is able to use them?
7.
Exist agreements that losses of the lessor (other than
insolvency) need to be borne by the lessee?
8.
Exist a „fair-value-guarantee“ in which the residual value is
fixed?
9.
Is there a pragraph for a following agreement by which the rent
is clear below the market rent?
These nine points reflect more or less law for rental objects, what is
for example the same like usual rent for flats. Therefore it is
understood that operational lease is a clear a rent and not a
purchase rent.
Summary
Wheter an object shall be leased or not depends on many items. For
example, how should a lack of liquidity be avoided (or in case of too
much liquidity, how can this be invested better than in bonds and
shares), what are the general accepted account policies (GAAP) of a
company, does the object shall be bought at the end or not etc.. These
and more questions we can help you to answer; the result will have
sustainable impact in the follwoing years for you.
Contact us, we would be glad to show you the possible
opportunities!
increasingly as favourite financing solution for all kind consuming
goods. But also machinery was in the following more and more
financed by leasing methods instead of simple loans. Leasing means
by nature “rent” but in the context of getting goods on credit it became
the naturalized meaning of “buy on credit”. This is not always the
case.
.
Financial Leasing
Financial Leasing is obviously the most
common method for leasing. Thereby the
leasing object is the property of the lessee
(party, who use the goods) and is activated in
the assets of the balance sheet. On the day
of the activation the lessee enter a corresponding financing
transaction in the liabilities of the balance sheet; i.e. he has a liability
vs. the lessor (party, who is granting a loan to the lessee). Financial
leasing may be with or without residual amount. That means, at the
end of a leasing contract a resdiual value can be agreed - this leads
during the leasing time that the monthly installments are usually
smaller.
Therfore the lessee is in the view of externals the holder and owner.
But in most cases the the lessor requests a guarantee for his loan in
form a right of retention for the leased object or any other applicable
surety.
In a firm’s financial statement the result of the leasing transaction is
monitored as installement and expense, mostly combined as one part.
This result is part of financial part in the profit and loss statement.
(Completely different is the operating lease, see below). The
installments are mostly decreasing but may be always the same
during the lifetime of the lease contract - this is only a calculatory topic
but has not impact on the overall result. The risk of the leasing objects
(damage, theft etc.) may be flexible, but usually they are beared by
the lessee.
As last specification the often floating interest rate is highlighted. But it
is also possible to arrange a fix interest rate for the whole lifetime of a
lease contract. Depending on the yield curve, the fix rate of mostly
higher than a floating rate. But a floating rate may rise in the future,
also above the fix rate and is therefore exposed to interest
movements of the market. 100% hedged at inception of the lease
agreement, the fix rate equals the hedged floating rate.
Even it agreed in the lease agreement that the lessor is owner of the
lease object, all lease objects need to monitored as property of
the lessee and subsequenctly activted as an assets! This might be a
problem at a first glance, because the same object cannot be property
of both parties at the same time. But it is no longer a (financial)
problem if the fact of the same time liability of the lessee is taken into
consideration.
Operational Leasing
This kind of leasing is a pure rent, in which the leasing object is the
legal property only of the lessor. Hence, only the lessor activates the
leasing goods and the lessee is using it. Usually the lessee is fully
responsible for the maintenance expenses and insurance of the
leasing objects.
The installments are usually always the same during the lifetime and
they are monitored in the operational part of lessees’ income
statement; same like for example rent for offices or warehouses. This
important difference in comparison to the financial leasing need to be
considered for financial statements when the focus is on the
operational result and the financial part is considered separately.
The lessee has at the end of the lease duration the choice whether he
would take over the leasing objects or not. The final price shall be not
mentioned in the lease agreement and need to be part of the future
market value of the lease object.
IFRS Specifications
IFRS has clear requirements on qualification of an operational lease.
If just one of the follwoing points are not fulfilled, the lease is
considered as Finanancial Lease. regardless, whether the agreement
says anything other.
Qualification Items for an Operational Lease according
IFRS
If just only one of the following 9 questions can be answered
with “yes”, the lease is a Financial Lease!
1.
Are all substantial risk are transferred to the lessee?
2.
Is the property automatical transferred to the lessee at the end
of the leasing time?
3.
Is the duration of the leasing more than 75% of the depreciation
time of the leasing object?
4.
Includes the agreement a purchase paragraph at the end of the
leasing time whereas the lessee has no other choice than to
buy?
5.
Is the present value of the lease installments more than 90%
than the purchase price of the leasing object? That means, no
residual value was agreed who represents less then 10% of the
purchasae price?
6.
Does the lessee needs to make significant changes at the
leasing objects that he is able to use them?
7.
Exist agreements that losses of the lessor (other than
insolvency) need to be borne by the lessee?
8.
Exist a „fair-value-guarantee“ in which the residual value is
fixed?
9.
Is there a pragraph for a following agreement by which the rent
is clear below the market rent?
These nine points reflect more or less law for rental objects, what is
for example the same like usual rent for flats. Therefore it is
understood that operational lease is a clear a rent and not a
purchase rent.
Summary
Wheter an object shall be leased or not depends on many items. For
example, how should a lack of liquidity be avoided (or in case of too
much liquidity, how can this be invested better than in bonds and
shares), what are the general accepted account policies (GAAP) of a
company, does the object shall be bought at the end or not etc.. These
and more questions we can help you to answer; the result will have
sustainable impact in the follwoing years for you.
Contact us, we would be glad to show you the possible
opportunities!
