Financial Leasing :
As per International Accounting Standards, ‘lease’ is an agreement whereby the lessor passes to the lessee the right to use the asset for an agreed period for consideration of rent. In operating lease, ownership of asset rests with lessor. Whole of rent received is income of lessor and expenditure for lessee.
So far as lessee is concerned, it is not shown as asset in his books and hence it is called ‘off balance sheet’ transaction. Of course, lease rental is shown as expenditure in books of lessee and hence it is not ‘off P&L account’ transaction.
Lessor reserves right to repossess goods if lessee fails to pay consideration in time.
Lessor charges Lease Management fess as initial payment. Such payment may be about 0.5% to 1% of price of asset.
In Space Capital Service v. Prakash Industries Ltd. (2000) 101 Comp Cas 437 = 30 SCL 420 (Del HC), it was held that leased property does not belong to lessee and lessor can take back possession – same view in GE Capital v. Dee Pharma Ltd. (1998) 4 Comp LJ 527 = 96 Comp Cas 192 = 47 DRJ 265 (Del) -followed in PNB Capital Services v. Atul Glass Industries Ltd. (2004) 51 SCL 122 (Del HC).