ASSIGNMENT TOPIC

LEASING

SUBMITTED TO
SIR ATHAR KHAN

SUBMITTED BY
MUHAMMAD DANISH MUJTABA
FARRUKH ALI UQAILI
IRFAN BHATTI
AVEENASH

CLASS
MBA REGULAR 3 YEARS
SECTION-D
DEFINING LEASING:
Leasing is a process by which a firm can obtain the use of a certain fixed assets for
which it must pay a series of contractual, periodic, tax deductible payments. The
lessee is the receiver of the services or the assets under the lease contract and the
lessor is the owner of the assets. The relationship between the tenant and the landlord
is called a tenancy, and can be for a fixed or an indefinite period of time (called the
term of the lease). The consideration for the lease is called rent. A gross lease is when
the tenant pays a flat rental amount and the landlord pays for all property charges
regularly incurred by the ownership

Under normal circumstances, an owner of property is at liberty to do what they want

with their property, including destroy it or hand over possession of the property to a
tenant. However, if the owner has surrendered possession to another (ie the tenant)
then any interference with the quiet enjoyment of the property by the tenant in lawful
possession is unlawful.

Similar principles apply to real property as well as to personal property, though the
terminology would be different. Similar principles apply to sub-leasing, that is the
leasing by a tenant in possession to a sub-tenant. The right to sub-lease can be
expressly prohibited by the main lease.

TYPES OF LEASING:
There are different kinds of lease arrangement. It makes sense to look at each one to
see which is best suited to your business, your particular circumstances and the asset
that you are acquiring.

The two main types of leasing are:

1. Finance lease.
2. Operating lease.

1. FINANCE LEASE:

A finance lease is a full-payout, noncancellable agreement, in which the lessee is

responsible for maintenance, taxes and insurance.

Finance leases are most attractive in cases where the lessee wants the tax
benefits of ownership or expects the equipment's residual value to be high. These
leases are structured as equipment financing agreements with residuals up to 10
percent. The lessee purchases the equipment upon lease termination at a pre-
agreed amount. The term of a finance lease tends to be longer, nearly covering
the useful life of the equipment.

2. OPERATING LEASE:
An operating lease is particularly attractive to companies that continually update
or replace equipment and want to use equipment without ownership, but also
want to return equipment at lease-end and avoid technological obsolescence. An
operating lease usually results in the lowest payment of any financing alternative
and is an excellent strategy for bypassing capital budgeting restraints. It typically
qualifies for off-balance sheet treatment and can result in improved Return On
Asset (ROA) due to a lower asset base. It can also result in higher reported
earnings in the early years of the lease.
HISTORY OF LEASING IN PAKISTAN:
With the development of Pakistan's economy during the past decade and the
privatization, deregulation and other industrial policies of the Government of
Pakistan, the economy received a boost after a prolonged period of sluggish economic
activity over the '70s and '80s.

The first leasing company was established in 1985. The

growth of the leasing industry in Pakistan initially
lacked momentum due mainly to a general lack of
awareness regarding its nature and benefits. From 1985
to 1997, 32 leasing companies were incorporated with
the minimum capital of Rs. 100 million. The minimum
capital requirement was raised to Rs. 200.00 million by
June 2000. This lead to mergers and acquisitions,
thereby the number of leasing companies is reduced to
27. In addition Nine leasing Modarabas & 3 Investment
Banks are actively involved in leasing business. In the mid-nineties annual average
growth was in the range of 30 - 35 percent. The real growth in the leasing came in the
period 1992 - 95, when over 20 leasing companies were set up. In October 1995,
leasing companies' paid-up capital was Rs.7.572 billion, with market capitalization of
Rs.6.0 billion as on 30-06-2002.

Leasing is not a very old phenomenon in Pakistan, but has gained acceptance very
rapidly. The reasons are: growing awareness, ease in obtaining the facility compared
to conventional forms of financing (bank loans), inherent tax benefits, simple
procedure and flexibility to cater to the needs of the customer. Profit is earned through
the use of the asset, not the ownership. In leasing, the ownership is vested in the
leasing company and in return for rental payments, the 'lessee' has virtually
unrestricted use of the asset. Leasing is a medium to long term hire of assets. It
effectively increases a company's total availability of capital and leaves other sources
of funds available for more profitable usage.

The leasing sector in general has experienced commendable growth over the years
and has adequately proved to be an alternative source of finance. In case of an
expected economic revival, the overall Leasing Sector is likely to regain its initial
momentum particularly in the backdrop of Islamization of the economy effective
fiscal year 2002 - 2003 due to its inherent potential of being in close conformity to
one of the permissible modes of financing under Shariah. However, in order to
improve the near future demand prospects of Leasing Sector in particular, the leasing
companies need to develop innovative products along with encouraging leasing of
plant, machinery and equipment relating to priority sectors of the economy including
energy (CNG), IT (Computer hardware, software and accessories), textiles,
engineering etc subject to their intrinsic value. Agriculture sector is receiving special
focus. The presence of commercial banks and DFI's in the lease market has impacted
the leasing company's margin, but their capability of offering large ticket leasing has
enhanced the acceptability of leasing options.
 CONSOLIDATED STATISTICS / OVERVIEW OF
LEASING SECTOR IN PAKISTAN

2006 2007 2008

No. of Companies 29 27 25
Paid up Captial 12,185 13,182 17,448
Reserves 8,599 7,877 8,477
Total Equity 20,784 21,059 25,925
Investment in Lease Finance 75,151 72,908 71,597
Investments 21,687 22,817 29,896
Borrowings 78,882 83,196 90,792
Revenues 14,665 15,028 16,907
Operating Expenditure 5,009 5,822 5,779
Financial Charges 7,419 8,467 8,954
Taxation 193 91 411
Net Profit 2,044 636 2,094
Cash Divident 900 961 884
Total Assets 123,501 128,315 136,569

TREATMENT OF LEASING IN THE FINANCIAL

STATEMENTS ACCORDING TO IAS 17
1. LEASES IN THE FINANCIAL STATEMENTS OF LESSEE:

a) OPERATING LEASES:

Lease payments under an operating lease shall be recognised

as an expense on a straight-line basis over the lease term
unless another systematic basis is more representative of the
time pattern of the user’s benefit.

b) FINANCE LEASES:

At the commencement of the lease term, lessees shall

recognise finance leases as assets and liabilities in their
balance sheets at amounts equal to the fair value of the
leased property or, if lower, the present value of the minimum
lease payments, each determined at the inception of the
lease. The discount rate to be used in calculating the present
value of the minimum lease payments is the interest rate
implicit in the lease, if this is practicable to determine; if not,
the lessee’s incremental borrowing rate shall be used. Any
initial direct costs of the lessee are added to the amount
recognized as an asset.

Minimum lease payments shall be apportioned between the

finance charge and the reduction of the outstanding liability.
The finance charge shall be allocated to each period during
the lease term so as to produce a constant periodic rate of
interest on the remaining balance of the liability. Contingent
rents shall be charged as expenses in the periods in which
they are incurred.

A finance lease gives rise to depreciation expense for

depreciable assets as well as finance expense for each
accounting period. The depreciation policy for depreciable
leased assets shall be consistent with that for depreciable
assets that are owned, and the depreciation recognised shall
be calculated in accordance with IAS 16 Property, Plant and
Equipment and IAS 38 Intangible Assets. If there is no
reasonable certainty that the lessee will obtain ownership by
the end of the lease term, the asset shall be fully depreciated
over the shorter of the lease term and its useful life.

2. LEASES IN THE FINANCIAL STATEMENTS OF LESSOR:

a) OPERATING LEASES:

Lessors shall present assets subject to operating leases in

their balance sheets according to the nature of the asset. The
depreciation policy for depreciable leased assets shall be
consistent with the lessor’s normal depreciation policy for
similar assets, and depreciation shall be calculated in
accordance with IAS 16 and IAS 38. Lease income from
 operating leases shall be recognized in income on a straight-
line basis over the lease term, unless another systematic basis
is more representative of the time pattern in which use
benefit derived from the leased asset is diminished.

b) FINANCE LEASES:

Lessors shall recognise assets held under a finance lease in

their balance sheets and present them as a receivable at an
amount equal to the net investment in the lease. The
recognition of finance income shall be based on a pattern
reflecting a constant periodic rate of return on the lessor’s net
investment in the finance lease.

Manufacturer or dealer lessors shall recognise selling profit or

loss in the period, in accordance with the policy followed by
the entity for outright sales. If artificially low rates of interest
are quoted, selling profit shall be restricted to that which
would apply if a market rate of interest were charged. Costs
incurred by manufacturer or dealer lessors in connection with
negotiating and arranging a lease shall be recognised as an
expense when the selling profit is recognised.

3. SALE AND LEASEBACK TRANSACTIONS:

A sale and leaseback transaction involves the sale of an asset and

the leasing back of the same asset. The lease payment and the sale
price are usually interdependent because they are negotiated as a
package. The accounting treatment of a sale and leaseback
transaction depends upon the type of lease involved.
SAMPLE LEASE OR RENTALAGREEMENT

By this agreement made at ___________________________________, PA on the

__________ day of _______________________, 20____, the Landlord ___________
_______________________________ and the Tenant _________________________
_______________________ agree as follows:

1. PROPERTY

The landlord hereby leases to Tenant for the term of this agreement

a. the property located at:

___________ __________________________ __________________________
No. Street Name Unit No.

_____________________________________________________________________
City State Zip

And

b. the following furniture and appliances on that property:

_____________________________________________________________________
_____________________________________________________________________
____________________________

2. TERM

The term of this lease is for ____________, beginning on ____________, and ending
on __________. At the expiration of said term, the lease will automatically be
renewed for a period of one month unless either party notifies the other of its intention
to terminate the lease at least one month before its expiration date.

(or)

At the expiration of said term, the lease will expire unless the tenant gives a written
notice at least 15 days before the termination date of the lease. Thereafter, the lease
will automatically be renewed for periods of one month until either party notifies the
other of its intention to terminate the lease. The notice of termination will be in
writing and will be effective on the next rental date no less than 30 days after the date
of the notice.

3. RENT

Tenant agrees to pay rent in the amount of __________ per month, each payment due
on the _________ day of each month and to be made at:
_____________________________________________________________________
Address City State Zip

4. UTILITIES/SERVICES

Landlord agrees to provide the utilities and services indicated:

__________ electricity __________ gas __________ water
__________ garbage collection __________ snow removal __________ other

5. DEPOSIT

Tenant has paid a deposit of $__________ of which Landlord acknowledges receipt.

Upon regaining possession of the property, Landlord shall refund to Tenant the total
amount of the deposit less any damages to the property, normal wear and tear
expected, and less any unpaid rent.

6. REFUND PROCEDURE

Forwarding Address—Tenant shall provide Landlord with a forwarding address at

which the Landlord can send him/her the deposit refund.

Landlord shall return the entire deposit to Tenant within 15 days after retaking
possession; or shall return so much of the deposit as exceeds any damages done to the
property during the Tenant’s residence, normal wear and tear expected, and any
unpaid rent. If the Landlord returns any amount less than the full deposit, he/she shall
also provide a written itemized list of damages and charges.

Tenant maintains the right to sue Landlord for any portion of the deposit not returned
to him/her which the tenant believes he/she is entitled.

7. INVENTORY CHECKLIST

The Tenant is provided with an Inventory Move-In Checklist attached to this lease.
The Tenant shall note the conditions of each item on the checklist and return a copy to
the Landlord within 10 days after taking possessions. If the Landlord objects to
inclusions of any item, he/she shall notify the Tenant in writing within 10 days. The
Tenant and Landlord shall note the condition of each item on the checklist after the
Tenant returns possession to the Landlord and shall give a copy to the other party.

The Landlord may not retain any portion of the Security Deposit for damages noted in
the Move-Out Checklist to which the Landlord did not object.

8. THE PARTIES ALSO AGREE

A. Tenant shall not sublease nor assign the premises without the written consent of
the Landlord (but this consent shall not be withheld unreasonably).

B. The Landlord may not enter the premises without having given tenant at least 24
hours notice, except in case of emergency. Landlord may enter to inspect, repair, or
show the premises to prospective buyers or tenants if notice is given.

C. Tenant agrees to occupy the premises and shall keep the same good condition, and
shall not make any alternations thereon without the written consent of the landlord.

D. Landlord agrees to regularly maintain the building and grounds in a clean, orderly,
and neat manner. Landlord further agrees not to maintain a public nuisance and not to
conduct business or commercial activities on the premises.
E. Tenant agrees not to use the premises in such a manner as to disturb the peace and
quiet of other tenants in the building. Tenant further agrees not to maintain a public
nuisance and not to conduct business or commercial activities on the premises.

F. Tenant shall, upon termination of this Agreement, vacate and return the swelling in
the same condition that it was received, less reasonable wear and tear, and other
damages beyond the Tenant’s control.

G. Any alternations to this Agreement shall be in writing and signed by all parties.
We, the under-signed, agree to this Lease:

LANDLORD TENANT
_________________________ _________________________
Signature Signature
_________________________ _________________________
Typed Name Typed Name
_________________________ _________________________
Address Address
_________________________ _________________________
Signature Signature
_________________________ _________________________
Typed Name Typed Name
_________________________ _________________________
Address Address