Lease Definition: A lease is a contractual agreement between a lessor (company, bank, or individual leasing out equipment) and a lessee (entity using the equipment and making payments).
Lease Term: Can span multiple years and accounting periods, e.g., 2020-2024.
Payment Timing: Payments typically due at the beginning of the accounting period, coinciding with the start (commencement) of the lease.
Types of Leased Equipment
Commonly leased items include:
Information Technology equipment (e.g., computers)
Transportation equipment
Construction equipment
Agricultural equipment
Reasons for Leasing Equipment
Mitigating Obsolescence: Leasing reduces the risk of equipment becoming obsolete; equipment can be returned and replaced.
Flexibility: Lease agreements offer flexibility with terms that can be short or long-term.
Cost-effective Financing: Leasing can be less costly than financing a purchase outright.
Lessor Overview
Types of Lessors:
Banks: Leverage easy access to capital to lease equipment.
Captive Leasing Companies: Associated with manufacturers, providing lease financing for their products (e.g., Ford Motor Credit, Caterpillar Financial Services Corp).
Independents: Non-bank, non-captive companies that provide leasing services.
Benefits for Lessors
Profitability: Leasing equipment is profitable, especially for banks due to lower interest rates.
Sales Stimulation: Captive leasing (e.g., Ford Motor, Caterpillar) boosts sales of parent company products.
Tax Considerations: Leasing arrangements can offer tax benefits.
Residual Value: Equipment often returns with higher-than-expected residual value, allowing lessors to gain additional profit.