The lease (or lease-purchase agreement , English 1 ) is a specific form of financing of investments .
In the context of a financial lease, a financial company (the lessor) makes a piece of equipment available to a company for a specified period, against payment of a periodic fee . At the end of the contract , the beneficiary company generally has the choice between several options: either to return the goods or to acquire them for an amount defined at the time of the conclusion of the contract, or to renew the contract on more often less expensive terms.
The practical consequences of this particular mode of financing are that:
- Since the beneficiary enterprise does not own the leased property until it has exercised the call option, it does not appear on the assets side of the asset’s balance sheet ;
- The beneficiary enterprise is nevertheless required to mention the existence of financial leasing transactions in the annexes of its balance sheet and in the list of commitments given;
- Leasing fees are tax deductible for a different period than the tax depreciation of the property.
Typology and challenges of leasing
Typology of leasing
According to the French chart of accounts
Leasing is a contractual technique whereby a company (called a leasing company) acquires, at the request of a customer (lessee-lessee), the ownership of movable or immovable property for professional use, with a view to rent them to the latter for a fixed period and in return for royalties or rents.
Financing technique appeared in the early 1960s, this operation should not be confused with a simple lease that the tenant can interrupt with a simple notice. It can not be confused with a hire purchase because its interest lies in the ability of the tenant to lift the option or not to do so, that is to say to become the owner of the property. He can choose either to return the property to the lessor company, or to renew the lease for a new term.
In France, it is governed by the Monetary and Financial Code (Articles L. 313-7 and following) 2 . A commercial company can not leasing in the usual way, this activity as usual is reserved for finance companies, holders of an authorization of the Prudential Control and Resolution Authority (ACPR) 3 . Nevertheless, the lease contract occasionally concluded by a person other than a financial institution is lawful.
It is often likened to leasing and “lease with option to buy” (LOA), considering that the second term is reserved for individuals. However, it is in legal terms contracts with different legal components, since the LOA is governed by the Consumer Code, while leasing is not 4 . The LOA is widely used for the financing of vehicles to the individual, and it is often in this case, proposed by a subsidiary of the manufacturer.
According to IAS / IFRS (International)
According to IAS 17 is considered leasing, acquisition of property by charges including:
- the contract provides for the transfer of the property to the tenant at the end of the contract.
- the contract has a duration close to the duration of use of the good.
- the contract provides for an exercise price of the option sufficiently advantageous to make it virtually certain that the lessee will buy the property at the end of the contract.
- the contract indicates at the beginning that the present value of the minimum payments due by the lessee is at least equal to the value of the leased asset.
Issues of Leasing
Leasing allows businesses and individuals to invest in property by paying a monthly lump sum payment called a royalty. This does not formally affect the statement of financial position, 5 particularly with regard to solvency ratios . In fact, the balance sheet concerned appears to be more flattering because it is less loaded with liabilities . The lessee records rents and royalties in its accounting as operating expenses. The result before tax decreases and with it the taxes. On the other hand, depreciation and loan interest are not deductible except for the option.
This means that in order to evaluate the interest of the leasing with respect to the acquisition by self-financing or by borrowing it is necessary to take into account the cash flows generated in each case. The net present value analysis appears to be the best tool for comparing investments according to funding patterns. In the end, lease payments have the advantage of being tax deductible over a different period of depreciation of the property.
The system is particularly used for vehicles and computer and industrial equipment, in particular because this type of contract makes it possible to include maintenance guarantees and the financing of VAT .
Main Features of Leasing
It is actually outsourcing in the purchase of goods and loan management . The entity that needs a property, makes the request to a leasing company, which becomes the owner of the specified material. This company leases the equipment for a period corresponding to the economic life of the product, at an interest rate fixed for the duration of the contract. The option to buy leasing is usually lifted because companies use this formula to become in fineowners of their equipment park. In the leasing the tenant is committed to pay the rents (royalties) until the end of the contract, as in a loan that is extinguished only after the final repayment of the capital. In France, leasing contracts never mention the interest rate , but a chain of rents. Under the call option clauses, the lessee has the option of acquiring the leased property at the end of the lease, on the basis of a predefined price.
Particularities of real estate leasing
Real estate leasing was created to finance the purchase or construction of a building, especially for companies or even municipalities. Just like leasing in general here it is about being able to contract an engagement between a civil person and a financial company. The latter buys or has built a building for professional use such as offices or a factory, and provides possession by a long lease to his co-contractor. For the duration of the contract, it is the leasing company that remains the owner of the building, the company that uses it being only the ” tenant Goods that she had bought or built. The lessor is not liable for the acts committed by the lessee. In fact, society plays only a financing role. As for the duration of the “lease”, it is often linked to the economic life of the building. It is for this reason that we rarely see a property leasing contract for less than twenty years. The ” rent ” is composed of a fraction of the capitalinvested by the leasing company, the current interest on this capital and a profit margin for the finance company. The advantages of leasing are many: on the one hand, it makes it possible to adapt the needs of the company concerned to the best, on the other hand, it allows the complete financing of the acquisition of a building. Finally, since the contracts are accompanied by a purchase option in favor of the company occupying the property after the lease can be imagined that the land or the building has received more -value value; in this case the user company did a good job. As for the real estate leasing company, it is making an investmentadvantageous because it remains the owner of the property for the duration of the lease without being responsible for the hazards and possible damage to the building. On the other hand, the practice of leasing entails some risks for the lessee: contrary to the traditional lease, the user company will be obliged to pay the annuity until the closing of the leasing contract even in the event of disappearance. of the building unless otherwise stipulated in the contract (early termination clause in the contract). In this case, she will have to pay a contractual penalty.
Accounting for lease finance
According to the French chart of accounts
In comparison with a property financed by debt, the major advantage of leasing in these accounting standards is to give rise, for the total cost of rent, only to a registration in terms of commitments, classified as off-balance sheet items. accounting, and thus lighten the appearance of debt when the debt / equity ratio was already high. In return, the assets are not included as assets in the balance sheet. In France leasing can be either furniture or real estate (for buildings ). Two types of deductible fees ( charges ) are therefore used in each period:
|612 ..||Royalty fee||…|
|44566||Deductible VAT on goods and services||…|
A security deposit is often found initially, it constitutes a financial asset.
At the end of the year, the principle of separating the years from the prepaid expenses must be recognized .
In case of building a provision is recognized for the non-deductible part of the royalties relating to the share attributable to the land of the building (because they are not depreciable).
|155||Provisions for taxes||…|
At the option, the acquisition of the property must be recognized and the reversal (reverse entry) of the provisions recorded. It will then be necessary to note amortization at the end of the year.
According to IAS / IFRS (International)
The standard IAS 17 establishes how to account for the lease. It is considered an item of property, plant and equipment with a financial liability on the balance sheet. Recognition is at the lower of fair value (market) and the discounted value of minimum contract payments. Of amortization and interest shall be recognized in the income statement. It is necessary to restate the lease credits when consolidating to IFRS standards, since the financial statements do not present:
- in the balance sheet, neither the financial debt, the assets nor the amortization,
- and the income statement, neither amortization nor financial interest.
Accounting for a lease-back lease
The lease back ” is a transfer of an asset to an organization that you rented in the lease.
It is necessary :
- Record the assignment of the property (including the exceptional product).
- Record the lease royalty entries.
- At the end of the year, record the reversal of the exceptional income for the capital gain realized against a product recorded in advance .
- At the end of the reporting period, record the staggered recovery of the prepaid income.
An example of Lease Back is present in hotel chains. Indeed, some prefer to sell their buildings to see it rented later, thus releasing cash that can be exploited for their main business.
Information to be provided in annex
According to international standards (IAS / IFRS)
IAS 1 requires companies to prepare an annex to the annual accounts that usually begins with a statement of compliance and then the statement of selected valuations. Assessments need to be made explicit including leases. In addition, a statement of receivables and payables, deferred taxes and off-balance sheet commitments must be disclosed.
According to the French chart of accounts
In the context of simplified presentation annexes :
- Only royalties and the balance to be paid by distinguishing between furniture and real estate leasing can appear.
In the context of annexes without simplified presentations:
- According to Article 53A of 29/11/83, the financial statements must be accompanied by an annex to the table summarizing the leasing. If the company does not require auditors , it can simply indicate the outstanding fees.
The table shows:
- The original value of the property concerned;
- The amount of the royalties (of the exercise and its cumulation);
- The possible depreciation and its accumulation;
- Remaining royalty (up to one year, one to five years and more than five years);
- The residual purchase price.
Notes and references
- ↑ Definition of Leasing [ archive ] on dictionnaire-juridique.com]
- ↑ Article L313-7 [ archive ] Monetary and Financial Code, Lgifrance, March 19, 2012
- ↑ Article L515-2 The leasing equipment and real estate companies [ archive ] Monetary and Financial Code, Lgifrance at March 13, 2012
- ↑ The lease with option to purchase and leasing [ archive ] Françoise Coppin, cbanque February 2009 updated on May 2, 2011
- ↑ Leasing not to increase the liabilities of the balance sheet [ archive ]
On other Wikimedia projects:
- leasing , on the Wiktionary
- Lend-Lease , known as the Ready-Lease Act, allowing the United States to send equipment and supplies to allied nations during the Second World War .
- Long-term rental , another rental tool, and possibly sales, of cars.