hi class in this chapter we're going to talk about lease accounting so let's first talk about what is the lease the leasing environment lease is a contractual agreement between lessor who is basically the company or the bank or the individual who is renting or leasing the equipment or product to the c dc is someone who needs the equipment and is making payments right so lisey is going to make payments based on the lease agreement and typically this can across multiple years multiple accounting periods so let's say from 2020 to 2024 five years right and typically the lease payment can be due in the beginning or in the end of accounting period typically it's in the beginning right so and the start or so-called commencement of the lease of the lease the payment will be due at this time and the leasee will receive the equipment and start to use those for its business use now some typical leased equipment involves information technology equipment that means computers and similar equipment transportation construction and agriculture so these are the typical groups of equipment that was involved some companies are here and giving an example to think about which companies are making the leases there's some additional company here i'll skip this part because it's pretty self-explanatory now why companies are trying to lease equipment other than buying them outright so why do they lease them instead of buying them one of the big reason is because of lesion so when you lease an equipment you don't have the risk of that equipment going to be obsolete in just maybe one or two years if that happens you can simply return the leased equipment and get a new one so there's a considerable protection against that and also the lease agreement can be very flexible so it can have uh terming terms these terms that are long term or short term right so if you buy least term means the length of the lease it can be a couple months or can be really long time so when you lease you can sign the lease agreement to make it very flexible and suitable for your company's needs for some companies it means less costly financing and those are some of the typical reasons why companies are leasing equipment other than just buying them now let's focus on the leaser so who are the leasor who is giving the equipment to the leasee for payments the first group of companies are the banks so the banks will have easy access to capital so they can buy some equipment and basically list it out or rent it out there are other companies called captive leasing companies and that basically means the manufacturers or their associated companies so for example ford motor has a department of ford motor credit caterpillar the company making construction equipment their leasing division is called caterpillar financial services corp ibm has a division called ibm global financing which is renting or leasing ibm equipment now this company typically focus on providing lease financing for their own products so for example if you go to the dealership of ford motor you may have the option to finance through the ford motor credit you may get a lease from them there is another group of lissor called independence so basically these are neither banks or captive leasing companies they also make at least two the lease accounting we are talking about today applies to all of these resource now why would companies want to lease out equipment the number one reason is probably profitability so they can gain profit by doing the business and typically especially for banks they have low interest rate for themselves so they have lower cost of using money basically so what they do is they can purchase equipment and lend all those for profit for ford motors and caterpillar these captive leasing companies it will stimulate the sales of the parent company's product so they may sell more cars or more construction machines and there are other tax considerations finally the residual value that means and the end of the lease when the equipment is returned to the resource the residual value is often times higher than expected so the resource can profit from that higher residual value