Ch13 Leasing

CHAPTER 13
LEASING
Learning Objectives:
• To have an idea about the three leasing companies in the Philippines

• To know what is a lease and the different types of leases
• To learn the basic lease provisions
• To know the advantages and disadvantages of leasing
• To know when a lease financing may be utilized
THREE LEASING COMPANIES
• Ford Credit
It is the largest company in the world dedicated to automotive finance. In 2001, it
financed the sale or lease of more than 5 million new and used vehicles around the
world. Ford Credit is a division of PRIMUS Finance and Leasing, Inc. which is
currently operating in the Philippines.
• PCI Leasing and Finance, Inc.

It is an 84%-owned subsidiary of Equitable PCI Bank. Its principal business is to
provide leasing and financing products to commercial clients. Its leasing products
include direct leases, sale and leaseback arrangements and dollar denominated leases.
• Japan PNB Leasing and Financing Corporation

This company is a joint venture between PNB and IBJ Leasing Co., Ltd.
Japan of the Misuho Financial Group.
A lease is a negotiated contract between the owner (lessor) of the
property allowing the firm (the lessee) the use of that property for a
specific period of time for a specific rental.
A contract of lease according to the Philippine Civil Code, “may be

of things, or of work of service. In the lease of things, one of the parties
bind himself to give to another the enjoyment or use of a thing for a
certain price, and for a period which may be definite or indefinite. In the
lease of work of service, one of the parties binds himself to execute a
piece of work or to render to the other some service for a certain price,
but the relation of the principal and agent does not exist between them.”
The lessee is the party that uses, rather than the one who owns, the
leased property. The lessor is the owner of the leased property.
TYPE OF LEASES
Leases may be classified into four general categories:
1. The financial lease;

2. The operating lease;
3. The sale and leaseback agreement; and
4. Net and gross leases
1. Financial Lease
It is a non-cancelable document that obligates the lessee to provide
periodic rental payments during the basic lease term. The payments are
calculated to repay the original amount invested by the lessor with a pre-
determined rate of return, all within the period of one lease.
Also known as a fully pay-out lease, financial lease is further
characterized by the lessee’s option to purchased the leased asset.
The non-cancelability of financial leases obligates the lessee to
continue the contractual payments even if it abandons the asset and no
longer has any use for it.
Under the financial lease, the firm (lessee) agrees to maintain the
asset even though ownership of the asset remains with the lessor.
2. Operating Lease
Also sometimes called service lease, is a kind of lease usually
cancelable by the lessee with proper notice and that the lessor usually
maintains the asset. It is a short-term lease used to finance equipment such
as computers, railroad cars, or tankers. The term of an operating lease
generally covers only a fraction of the economic life of asset.
Some leased offices are operating leases. The tenant can cancel the
leases under certain conditions and with a specified number of days notice,
while repairs to the building housing the offices are usually handled by the
landlord (lessor).
3. Sale and Leaseback
It is a special type of lease in which a firm owns an asset, sells it to
another then uses the same asset on a lease agreement with the new
owner. It is more commonly used for real estate.
An example is the firm which owns land and a building, but is in

need of additional working capital to support expansion. The firm can sell
the land and building to an investor and simultaneously enter into a lease
agreement to use the property. The proceeds from the sale provide
working capital and the firm has still the use of the land and the building.
4. Net and Gross Leases
Leases can either be net or gross. Under the net lease agreement, the
lessee bears the expenses associated with the asset, such as taxes, repairs
and maintenance and insurance. The expenses are borne by the lessor in a
gross lease.
BASIC LEASE PROVISIONS
A typical lease agreement contains some or all of the following
provisions:
1. The period over which the asset is to be leased.

2. The rental payments and the payment dates.
3. The assignment of responsibility to one of the parties for such
associated costs as taxes and maintenance.
4. Security provisions like prohibitions against the lessee incurring
additional debt, paying dividends, or reacquiring common stock.
5. Excellent clauses allowing the lessor to raise the periodic rental
payments at some pre-determined dates over the life of the lease, or
in response to increases in costs.
6. Options allowing the lessee to renew the lease or purchase.
ADVANTAGES OF LEASING
Leasing provides certain benefits to the lessee. These are the
following:
1. The risks inherent to ownership of the property under lease are borne
by the lessor;
2. Flexibility;
3. Piecemeal financing;
4. Avoidance of restrictions accompanying debt;
5. Evasion of budgetary restrictions;
6. Cash is fixed for more profitable investment;
7. Possible tax advantages over ownership; and
8. Lease financing does not appear as debt in the company’s balance
sheet.
1. Lessor Bears Ownership Risks
If the firm decides to buy the property it needs, it must be ready to

bear the risks accompanying such ownership. Among the risks that must
be reckoned with are the following:
• The risk of obsolescence;

• The risk of acquiring a defective title to the property; and
• The risk of losing the property due to some unforeseen events.
2. Flexibility
If the leased asset proves to be unprofitable, the lessee is free to

abandon the use of the asset after the expiry of the lease.
3. Piecemeal Financing
Companies growing at a modest rate may find bond financing very

costly. As bond financing is economical when bigger amounts of bond
issues are involved, a company requiring additional funds in small amounts
may be penalized unnecessarily by the cost of floating small but varying
amounts of bond issues. The burden brought about by such costs are not
associated with lease financing.
4. Avoidance of Restrictions Accompanying Debt
Bond issues at times, restrict the borrower from acts of further

borrowing. If the firm needs additional funds to finance its operations, it
has no choice but to wait until the bond issues are redeemed. Under a lease
agreement, such restrictions are seldom incorporated.
5. Evasion of Budgetary Restrictions
In companies operating under a capital budgeting system, certain

requirements must be complied with before expenditures on capital assets
are made. It may even turn out that certain requests could not be approved
due to some restrictions imposed by the system. Lease agreements are not
covered by budgetary restrictions and the use of required assets is possible.
6. Cash Made Available for More Profitable Investment
In a lease agreement, the company’s cash is freed and could be used for
more profitable activities. For instance, a firm may elect to use office spaces
under a lease agreement, instead of utilizing precious cash for the
construction of building.
7. Tax advantages Over Ownership
Leasing provides an alternative to the firm. This alternative, in

return, makes it possible for the firm to reduce its tax burden. The
expenses related to leasing are called rental payments, while those
applicable to ownership of assets refer to depreciation, finance charges,
and interest.
8. Lease Does Not Appear as Debt
When capital assets are required, the firm may opt to borrow to
finance the need, or a lease agreement may be arranged with another
party. When the firm elects to borrow, the resulting obligation is shown
on the sheet. When capital assets are financed by a lease agreement, no
liabilities are recorded in the balance sheet as a result of such agreement.
DISADVANTAGES OF LEASING
1. It is more costly than if the firm has purchased the asset;
2. The benefits of depreciation, investment, tax credits, and salvage
value are not availed by the lessee, and
3. Even if the firm can abandon unprofitable operations, it cannot
abandon the lease payments.
WHEN LEASE FINANCING MAY BE
UTILIZED
It must be utilized only when it is financially defensible. It must

offer any of the following:
1. There must be cost savings over borrowing;

2. It must be available where an equivalent amount of debt financing
is not available; or
3. Some offsetting advantage which in the opinion of management
justifies its high cost.
Activity
From your perspective what is the meaning of

Leasing in this chapter and give some
example/s. Make an intro, body and conclusion.
THANK YOU & GOD
BLESS!

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CHAPTER 13

• To have an idea about the three leasing companies in the Philippines

• PCI Leasing and Finance, Inc.

• Japan PNB Leasing and Financing Corporation

A contract of lease according to the Philippine Civil Code, “may be

Leases may be classified into four general categories:

1. The financial lease;

An example is the firm which owns land and a building, but is in

1. The period over which the asset is to be leased.

If the firm decides to buy the property it needs, it must be ready to

• The risk of obsolescence;

If the leased asset proves to be unprofitable, the lessee is free to

Companies growing at a modest rate may find bond financing very

4. Avoidance of Restrictions Accompanying Debt

Bond issues at times, restrict the borrower from acts of further

In companies operating under a capital budgeting system, certain

6. Cash Made Available for More Profitable Investment

Leasing provides an alternative to the firm. This alternative, in

8. Lease Does Not Appear as Debt

It must be utilized only when it is financially defensible. It must

1. There must be cost savings over borrowing;

From your perspective what is the meaning of

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