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1. Leasing - what is it?
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What is leasing
History of Leasing
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History of Leasing
According to historians and economists of leasing transactions were, in ancient Sumer and the
state date back to around 2000 BC. er. Thus, the clay tablets found in the Sumerian city of Ur,
contain information about the lease of agricultural implements, land, water sources, cattle and
other animals.
Historians have also argued that Aristotle referred to the idea of leasing the treatise "Wealth is in
use, not ownership," written around 350 BC English author T. Clark argues that the lease had
been known long before Aristotle lived: he finds several provisions of the lease in the laws of
Hammurabi, taken around 1760 BC The Roman Empire also has not remained aloof from the
problems of leasing they are reflected in the institutions of Justinian.
Introduction to the economic lexicon of the term "leasing" (lease - take and pass the property for
temporary use) associated with the operations of the telephone company Bell, whose leadership
in 1877, decided not to sell their phones, and rent. However, the first society for which leases
have become the basis of its activities, was established only in 1952 in San Francisco, the
American company "United States Leasing Corporation", and thus the U.S. has become home to
new business, particularly banking.
In the early 60's American business "moved" leasing across the ocean to Europe, where the first
leasing company - "Deutsche lising GMBH" appeared in 1962 in Dusseldorf. By the mid-60's
leasing operations in the U.S. accounted for 1 billion dollars. By the end of the 80 years they
have exceeded 110 billion dol.2, ie a quarter-century have increased by more than a hundred
times. Such rapid growth in rental operations due to certain benefits associated partners in the
leasing transaction. At present, the countries with market economies, leasing operations for
business entities are advantageous for re-equipment of production.
In 1980 - ies. in the United States acquired the distribution of leasing aircraft. During these years,
the corporation MacDonnell Douglas managed by a new financial policy by means of leasing to
gain a market for their model aircraft in competition with Boeing. Douglas proposed the concept
was called "Fly before buy"
In Western Europe the first financial leasing companies emerged in the late 50's - early 60's. In
England, pioneered the modern leasing business was the company "Mercantile Leasing

2. Corporation", pre-emption in 1960, however, the development of leasing operations hampered
by the uncertainty of their status in terms of civil, commercial and tax law. Only after the tax
legislation reflected the legal status of the consolidation of leasing contracts, their growth starts
to be characterized by a high rate.
Since the early 60's leasing business has its own development in the Asian continent.
Currently, most of the world's leasing market is concentrated in the Triangle, U.S. - Western
Europe - Japan. " In Western Europe, lessors act mainly specialized leasing companies, which in
75-80% of cases are controlled by banks or their subsidiaries are considered.
For Japan, the characteristic is the expansion of leasing operations from funding services to
provide "service package" that includes a combination of sales, leasing and loans. These services
are called complex lease.
In Russia, leasing was used until the early 90's. in a relatively small scale and only in
international trade. Leasing considered Soviet foreign trade organizations, primarily as a form of
acquisition or sale of equipment such as large universal and other expensive machines,
production lines, road construction, forging and pressing, power equipment, as well as repair
shops, aircraft, ships, vehicles , computers, etc., using a special (form) of credit.
A variety of leasing operations, actively used Minmorflotom USSR, is hiring a ship without a
crew.
Beginning of the active development of leasing operations in the domestic market can be defined
in 1990, in connection with the relocation of enterprises on the rental management forms.
Noticeable phenomenon in the formation of the initial rules of leasing became the basis of
legislation of the USSR and Union Republics on lease from 23 November 1989 and a letter from
the State Bank on Feb. 16, 1990 № 270 "0 chart of accounts", which was submitted to the
procedure for presenting leasing in accounting. Develop a network of commercial banks
contributed to the introduction of leasing in banking practice.
The Russian Government has adopted a number of decisions that contribute to the development
of leasing operations. Presidential Decree of 17 September 1994 № 1929 "On the development
of financial leasing in investment activity" has identified priorities for the development of
leasing. Pursuant to this Decree the Government of the Russian Federation adopted the
Resolution № 633 "On the development of leasing in investment activity." This Resolution
approves the Provisional Regulations on the lease. In furtherance of the Resolution adopted
guidelines on the calculation of lease payments, the approximate agreement on financial leasing
of movable property with the full amortization, the typical articles of the leasing company.
Then there was a federal law of 29 October 1998 N 164-FZ "On Leasing." Also adopted a
federal program for the development of leasing in Russia in 1996-2000. Whose purpose is to
create favorable legal, economic, organizational and methodological conditions for leasing
development, including the establishment of regulatory framework, improving the tax, the
introduction of generic guidance documents on leasing transactions introduction of licensing of

3. leasing companies, the organization of the Fund to promote leasing in the Russian Federation,
etc.
Today in the XXI century leasing is one of the most effective ways to purchase costly plant and
equipment, upgrade existing capital assets. In developed countries the share of leasing operations
account for 30-40% of real investment in the economy.
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The history of leasing
by Pradeep Kumar on May 12, 2012
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19. The history of leasing Document Transcript
1. The History of LeasingBy Jeffrey TaylorLeasing is corporate Americas biggest
external source of equipment finance. Itsbigger than bank loans, bigger than bonds,
bigger than stocks, bigger thancommercial mortgages. And its the fastest growing form of
business investment.This year alone, over $220 billion dollars of equipment will be
leased in the UnitedStates and $550 billion throughout the world. Overall, worldwide
leasing volumecontinues to grow. Unfortunately, several country volumes have
droppedprecipitously, thus making it more difficult to expand their leasing markets.U.S.
companies lease everything from printing presses to power plants, haybalers to
helicopters, office copiers to offshore drilling rigs, telecom equipment tolarge-scale
computer networks.Over 35% of all capital equipment is financed through some form of
leasing. Eightout of ten companies - from mom and pop proprietorships to the Fortune
500 -have turned to leasing to get ahead and stay ahead.How did we get here? How did
leasing become the most popular financingalternative in the world? Lets explore its rich
history.In 1984, while the leasing industry was reeling from the third major tax change
infour years, archaeologists found clay tablets from the ancient Samarian city of Ur.They
discovered that these tablets documented farm equipment leases from theyear 2010
BC.Fifty years later, the king of Babylonia in his famous Code of Hammurabi enactedthe
first leasing laws. The ancient civilizations of Egypt, Greece and Romeengaged in leasing
transactions of real and personal property, while thePhoenicians actively promoted
leasing by chartering ships to local merchants.Leasing first appeared in the United States
in the 1700s to finance the use ofhorse-drawn wagons. By the mid-1800s, railroad
tycoons, battling to extend theirprivate railroads across the country, required tremendous
amounts of newcapital. Most banks, however, considered railroad financing risky and
refused tolend to the emerging transportation industry. Locomotives, cars and
otherrailroad equipment had to be financed using new and creative methods theforerunners of the equipment lease.This new scheme involved third-party investors
who would pool their funds,purchase railroad cars from a manufacturer, then lease the
cars to the railroad inthe form of "equipment trust certificates". The railroad would
receive title to theequipment after making periodic payments to cover the purchase price
plusinterest. This method of
2. financing resembles the modern-day conditional sale.In the early 1900s, companies
began to act as lessors for this equipment byleasing it out while maintaining title to it.
Often, the lessees would be shipperswho wanted control over their shipments without the
responsibilities ofownership. This method introduced the operating or true lease
concept.Meanwhile, other manufacturers were looking for additional ways to sell
theirmerchandise. They created the installment sale, which allowed consumers
andcommercial markets to increase their purchasing power by paying for equipmentover
time.By the mid-1920s, manufacturers were basing too many major investmentdecisions
on credit sales. Their failure to recognize this danger helped bringabout the Great
Depression in the 1930s. As many businesses suffered, theybecame wary of "creative"
financing and leasing was placed on hold.Leasing returned to popularity during World
War II. Manufacturers entered intocost-plus contracts with the government. These
contracts allowed themanufacturer to recover actual costs plus a guaranteed profit. In

20. order tominimize costs, many of these companies leased special-purpose machineryfrom
the government. Companies discovered that they could return theequipment to the
government at the end of the lease, thus protecting themselvesagainst owning technically
obsolete equipment when the war ended.In the 1950s, consumers started to demand a vast
array of goods. They wantedspeed, convenience and mobility. Manufacturers utilized
leasing to help overhaulold operations quickly and create new facilities for the production
of newproducts like televisions, advanced communications equipment and airplanes.This
rapid growth provided an ideal backdrop for the creation of a formalequipment leasing
industry.The leasing industry has experienced phenomenal growth over the years. In spite
of astrong US dollar, volatile exchange rates and unpredictable interest rates, the
leasingindustry continues to survive and expand. Today, all over the world, you can see
banks,insurance companies, captive finance companies, third-party vendors, brokers,
andindependent leasing companies all competing to serve lessees.What were the major
factors that helped make leasing the popular financial alternativethat it is today?The
volatility of the general economy was one factor. Leasing, once considered to
beaggressive financing used only by those unable to get conventional terms, is
nowregarded as a stable alternative to wildly-fluctuating interest and inflation rates.
Forexample:
3. In December 1980, the prime lending rate reached 21.5% and low-risk instruments like
U.S. Treasury bonds stood at 17%. Double-digit inflation became common in the 1970s,
causing many assets to be priced out of reach without financing. Annual federal budget
deficits climbed continuously, from $25 billion in 1968 to a staggering amount of $230
billion in 1990, causing the national debt to reach a mind-boggling $2.7 trillion.This
financial roller coaster caused many traditional funding sources to tighten theircredit
requirements, opening the door to new methods. At the same time favourable taxlaws and
other regulations were bolstering leasing. Lets return to the 1950s to see whysome of
these favourable changes were brought about.In 1953, with the nation in a post-war
slump, Congress wanted to promote capitalformation and manufacturing. In response, the
IRS issued the Internal Revenue Code of1954. Section 167 of that code gave the
owner/lessor of equipment the ability to (1)deduct ordinary expenses associated with a
lease and (2) accelerate depreciation byusing either the 200% declining balance or the
sum-of-the-years digits method.By increasing tax deductions in the early life of the asset
and deferring taxable incometo the later years, the Code was intended to enhance the
benefits of ownership andencourage capital spending. However, many companies like
railroads and airlines thatneeded the use of large and costly equipment couldnt afford to
purchase it outright andcouldnt take advantage of these new tax benefits.For the first
time, a real distinction could be made between the benefits of ownershipand the benefits
of use.U.S. Leasing Corporation was the first general equipment leasing company formed
totake advantage of these tax benefits of ownership while passing the right to use
theequipment and the expense of maintenance to another party. In these transactions,
titleusually passed to lessees upon their exercise of a nominal purchase option.By 1955
the use of leasing had spread, and several more leasing companies enteredthe market.
While they were bringing new products into the leasing arena at a rapidrate, a major tax
issue was surfacing. The tax code, which had been issued by the IRSthe previous year,
had not distinguished clearly between a true lease and a conditionalsale agreement. Since
leasing companies didnt want to lose any of these newfound taxbenefits, they were

21. reluctant to pursue situations, which would be questioned by theIRS.With the intention of
defining a true lease for tax purposes, the IRS issued Revenue
4. Ruling 55-540 in 1955. This ruling classified a transaction as a true lease only if none
ofthe following conditions were true: 1. Any portion of the lease payments was applied to
an equity position in the asset 2. Ownership automatically passed to the lessee at the end
of the term 3. The amount paid under a short-term lease was a significant portion of the
purchase price 4. Rental payments were substantially higher than fair market 5. The
transaction contained a nominal purchase option 6. Any portion of the lease payment was
characterized as interest.If any one of these conditions were true, the transaction was
considered a conditionalsale, and only the lessee received the tax benefits.During the
remainder of the 1950s, the economy remained somewhat flat. A mildrecession in 196061 once again spurred Congress to action, resulting in dramaticchanges in the leasing
industry.In another effort to pump up capital expenditures, Congress introduced in 1962 a
newtax benefit, which would provide the leasing industry with its biggest boost.
TheInvestment Tax Credit (ITC) provided purchasers of capital equipment with a tax
creditthey could use to offset their total tax liability to the government. The purchaser
coulddetermine the amount of this credit by taking 7% of the original equipment
cost.Lessors who could establish true leases were also entitled to the ITC. Therefore,
asmart lessor would keep the ITC, reduce the monthly rental payments from the
lessee,and still show higher after-tax yields.Another significant event occurred in 1963,
when the Comptroller of the Currencyissued a ruling permitting banks to get into the
leasing business. Before this, nationalbanks were not allowed to own or lease personal
property since their business wasrestricted to lending money. Previous involvement in
leasing had been limited mainly tothe trustee function involving equipment trust
certificates. As soon as banks began totake an active role in equipment leasing, the use of
equipment trust certificates began tofade.The escalating war in Vietnam during the late
1960s affected both the social andeconomic fiber of American life. The Treasury steadily
increased its borrowings tofinance defense spending and social programs, pushing
interest rates on both federaland corporate debt instruments up to the 7% and 8% levels.
By 1968 the federal deficithad reached $25 billion.
5. Congress began using ITC to prod the economy in whichever direction
seemedappropriate, with the following results: 1962 - ITC introduced 1966 – repealed
1967 - re-enacted 1969 – repealed 1971 - re-enacted 1986 – repealedThis flip-flop of tax
benefits along with rising interest rates gave the leasing industry itsfirst taste of its
love/hate relationship with the government.1970 ushered in a turbulent decade for the
economy. The continued emphasis ondefense spending and the push for technological
advancement left the government withan increasing budget deficit, declining GNP and
growing unemployment.In August of 1971, President Nixon imposed the first peacetime
wage and pricecontrols. This resulted in companies jacking up their prices and then
discounting themfor selected customers in order to stay within the confines of the law. By
1973 theWatergate scandal and the Arab oil embargo had caused the U.S. dollar to be
devaluedtwice.The prime rate steadily increased during this decade, from 6% to 15.75%.
Inflation roseto 12%, discouraging savings and reducing capital available for investment.
Corporateprofits were sharply reduced, and the economy slid deeper into recession.
Researchand development, investment in new equipment and the planned replacement of
agingassets were usually the first budget items to be cut.Congress responded by

22. reinstating ITC in 1971, then increasing the ITC rate from 7% to10% in 1975. In 1972,
Congress introduced Asset Depreciation Ranges (ADR). This lawcreated hundreds of
asset categories and prescribed useful lives for depreciatingassets. Before this, lessors had
to guess the useful life of the asset, and if a lessorchose a shorter life than the IRS thought
reasonable, he would lose depreciationbenefits and increase his tax liability. But ADR
provided the lessor with a method forselecting a useful life that could not be challenged
by the IRS.Banks were given a stronger foothold in the leasing industry when Congress
amendedthe Bank Holding Company Act in 1970. This amendment allowed banks to
form holdingcompanies and bank subsidiaries. As subsidiaries, bank leasing companies
were nolonger subject to the stringent reserve requirements of their parent banks,
providingthem with more financial leverage and a greater profits.Companies like IBM
and Xerox began to use leasing more widely to finance thedistribution of their products.
They maintained equipment title, offered shorter terms,
6. and remarketed the equipment after the lease. These benefits attracted manycustomers
who wanted to avoid the risk of computer and copier technical obsolescence.Vendor
leasing quickly spread to other types of equipment, including office machineryand
furniture, cash registers, and restaurant equipment.The marketplace also created new
types of products. One example is the leveragedlease, a highly sophisticated product that
combines three parties -- lessor, lessee andlender. In this type of transaction, the lessor
finances the equipment by putting in 20%equity and borrowing 80% from a lender on a
non-recourse basis. The lessor thenkeeps all of the tax benefits as well as deducting the
loan interest. The leveraged taxbenefits allow the lessor to offer the lessee extremely low
rentals while maintaining ahigh yield.Since the complex structuring of leveraged leases
was not foreseen in 1955, manylessors required private tax rulings from the IRS. In 1975,
the IRS responded by issuingRevenue Procedure 75-21. This procedure amplified its
1955 ruling and specified inmore detail what criteria would be used to govern leasing
transactions for tax purposes.Under Revenue Procedure 75-21 five conditions had to be
met to assure a favourableruling: 1. The lessor must maintain a minimal "at risk"
investment of 20% during the term of the lease 2. The term of the lease must include all
renewal or extension periods, except for optional renewal periods, at prevailing fair
market value 3. Lessee may not purchase the asset at less than fair market value 4. The
lessee may not furnish any part of the cost of the asset 5. The lessor must expect a profit
from the transaction apart from the tax benefits of ownership.While the IRS was dealing
with the tax aspects of lessors, the Securities and ExchangeCommission (SEC) was
concerned with inconsistent lessor balance sheets and incomestatements. They wanted to
standardize the financial statement reporting methods ofboth lessors and lessees in order
to help investors make better-informed investmentdecisions. In 1976, the Financial
Accounting Standards Board (FASB), under pressurebythe SEC, issued a comprehensive
lease accounting document entitled FinancialAccounting Statement No. 13 (FAS 13).This
statement classifies a lease as either a capital lease or an operating lease from thelessees
viewpoint. If the lease is determined to be a capital lease, the lessee mustaccount for it as
an outright purchase and show the asset on their financial statements.
7. An operating lease, on the other hand, is not reflected on the balance sheet and
futurerentals are disclosed only in the footnotes.Lessors are subjected to similar tests
designed to create accounting symmetry, butthese criteria leave some loopholes that can
enable both parties to leave the asset offthe balance sheet.In the 80’s, the leasing industry

23. witnessed five major tax laws in a very short period oftime: Economic Recovery and Tax
Act of 1981 (ERTA) Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) Deficit
Reduction Act of 1984 (DRA) Tax Reform Act of 1986 (TRA) Competitive Bank
Equality Act of 1987In August of 1981, Congress passed ERTA, an extensive revision of
the1954 InternalRevenue Code. Led by a Republican majority in the Senate, Congress
believed that theprivate sector would spend and invest more money and stimulate the
economy if its taxburdens could be sharply reduced.Two features of this law had major
impacts on leasing (1) ACRS - Accelerated CostRecovery System and (2) Safe Harbor
Leasing.ACRS replaced the complex ADR depreciation system with a simpler and faster
costrecovery system. This new system contained only five classes of assets ranging from
3-year to 15-year life spans and specified the percentage of cost to be written off in
eachyear. This enabled an owner/lessor to fully depreciate an asset without having
toestimateuseful life and salvage value.Safe harbor leasing had a major impact on the
entire business community. Tax benefitswere made available to lessors other than those
complying with "true lease" guidelines.Only three tests had to be met to qualify for the
tax benefits of ownership: Lessor is a corporation (excluding subchapter S and personal
holding companies) Lessor’s minimum investment in the leased asset is never less than
10% (reduced from 20%) The term of the lease does not exceed 90% of the useful life of
the asset or 150% of the present class life of the asset.If all of these requirements were
satisfied, the transaction would qualify as a lease fortax purposes regardless of other
factors previously disallowed, like bargain purchaseoptions and limited-use property.
8. Another new feature of safe harbor leasing was the tax benefit transfer (TBT)
lease.This enabled lessors to structure a lease with direct matching of incoming rentals
anddebt payments to make a single payment to the lessee for the tax benefits. This
aspectof the law led quickly to major sales of tax shelters to "nominal lessors" who were
notnormally in the leasing business. Several major companies, General Electric,
forexample, did not pay taxes that year due to their tremendous participation in the
TBTmarketplace.As soon as it was enacted in 1981, ERTA became a scapegoat for the
continually risingfederal budget deficit. The volume of leases written jumped from $32.8
billion in 1979 to$57.6 billion in 1982, creating an unforeseen loss of tax
revenues.Congress passed TEFRA in August of 1982 to increase tax revenues lost under
ERTA.This new act repealed safe harbor leasing and replaced it with the "finance
lease",along with a complicated phase-in schedule. It also introduced the "90-day
window",allowing leases to be written on new equipment already in service.The finance
lease liberalized the "true lease" guidelines of Revenue Procedure 75-21 inone major
respect - fixed price purchase options of at least 10% would qualify for
leaseconsideration. It also contained some unfavorable requirements - spreading the
ITCbenefits over 5 years and limiting the amount of tax liability that could be offset by
ITC.Although interest and inflation rates had returned to acceptable ranges by 1984,
thebudget deficit was growing enormously and became a political hot potato. In June
of1984, Congress passed the Deficit Reduction Act, the third major tax law in four
years,to reduce the size of the budget deficit by raising tax revenues.This new act
postponed the introduction of finance leases from January 1984 untilJanuary 1988, as
Congress recognized the impact on the Treasury of the rapidlygrowing leasing
industry.The Deficit Reduction Act of 1984 affected the leasing industry in several other
ways: Time value of money was introduced by requiring lessors to adjust uneven rental

24. streams for tax purposes Depreciation benefits on real property were reduced True-tax
treatment was disallowed for leases to foreign corporations not subject to U.S. income tax
TRAC leases, primarily affecting the vehicle leasing industry, were recognized as truetax leases
9. In December 1984, President Reagan submitted a proposal to Congress for
taxsimplification. Some of the aspects of this proposal, especially the elimination
ofinvestment tax credit, caused some concern within the leasing industry. That
concernfinally came to past with the signing of the Tax Reform Act in October of
1986.This tax change was so complicated that it required 2000 pages to document it.
Majorchanges affecting leasing included: Repeal the Investment Tax Credit Lengthening
equipment useful lives Introducing an alternative minimum tax Reducing depreciable
amounts in the earlier years.In 1987, Congress decided to help the banking community
compete more effectivelyagainst the independent leasing companies in the operating
lease market by passingthe Competitive Bank Equality Act of 1987. In this legislation,
Congress allowed majorfinancial institutions to put up to 10% of their assets into
operating leases. Prior to thisnew law, banks could not provide this type of lease due to
the perceived risks and costsof direct ownership.Nonetheless, few banks took advantage
of this opportunity and left the equipmentleasing industry altogether. In fact, independent
leasing firms began to move into otheraspects of structured asset finance to take
advantage of the Banks reluctance to avoidhigh-risk projects.FASB 91 required leasing
companies to reduce the amount of initial direct costs eligibleto be booked at lease
inception, FASB 94 required leasing companies to consolidatetheir leasing subsidiaries
activities with the parent company, FASB 95 required leasingcompanies to produce cash
flow statements instead of source and use of fundsstatements and FAS 96 totally
overhauled the area of income tax/deferred taxcomputations and presentation.From 1988
to 1995 the equipment industry went through some extremely difficult times.Industry
leading newspapers ran monthly headlines such as, "Survival in the 90s", and"The Lessor
Under Chapter 11". Article 2A of the Uniform Commercial Code, whichcodified leasing
transactions, was initially adopted in 17 states. And the EquipmentLeasing Association
(ELA) was losing members left and right.Finally, in the mid 90’s, Wall Street and the
business community discovered the Internetand the IPO market. It was almost impossible
not to make money. Companies wereexpanding quickly and Silicon Valley in California,
and the high-tech communities in
10. Texas and Massachusetts, supplied talent to automate every process possible.
Theword E-lease was invented and volume went through the roof. Under President
Clintonthe economy grew more than 4-5% per year. Companies such as Sun, HP, IBM,
Ciscowere household names and started their own captive finance
companies.Unfortunately, the party could not last forever. And in 2001, the US
recognized its firstmajor recession in decades. Alan Greenspan lowered the federal
borrowing rate 9 timesto an all-time low of 2.5%. As of this writing, President Bush is
still considering alteringthe alternative minimum tax and lowering corporate tax rates to
spur the economy. TheELA would prefer changing the accelerated depreciation rules.As
a result of the World Trade Center bombings, it may take years to rebuild the
USinfrastructure. Whatever happens, I can assure you, the leasing industry will be
thereand at the front of the line – a privilege that rarely comes along in life.Jeffrey Taylor
frequently writes on leasing subjects and has been published in the MolloyMonitor, Asian

25. Leasing Journal, Journal of Equipment Lease Financing, Practical CashManagement,
Asset Leasing Digest, Handbook of Equipment Leasing, E-trucker Magazine
andBusiness Asset Magazine.Top of
Pagefbibusiness.com/history_of_leasing.htmIntroduction to LeasingWith the average
cost of a new car rising each year, it is becoming more important tounderstand the
options available for financing. Leasing has become a much morewidespread option
available to consumers through a number of different sourcesincluding automobile
manufactures, local dealerships, financial institutions, andindependent leasing
companies.Because of the variety of different leasing plans available, the amount of
regulation ofthe leasing industry, and what can sometimes be a high stress situation of
negotiating aprice for a car, consumers need to be well informed so they can make a
decision thatbest fits their individual situation.Leasing is not for everyone, and it is
important for you to consider things like how longyou like to keep your car, how many
miles you drive your car each year, how muchmoney you want to make available for an
initial payment, and how you value ownershipor equity of your car.
11. The basic principle of leasing is that you pay only for what you use of the car. The
mostfrequently cited advantages of leasing are that leasing requires a lower initial
cashoutlay, the monthly payments can be lower than a loan, and you can usually get
morecar for your money. Common disadvantages are that at the end of the lease you
dontown the car, and you may get charged for excess miles driven and excess wear
andtear on the vehicle.The basic principles of buying your car, either with cash outright
or with a loan, is thatyou have or are building equity toward ownership. The main
advantage is that you ownthe car after all the payments are made. The main disadvantage
is that by the time youactually own the car, it may have cost you more that the car is
worth.Our goal is that after having read this guide you will have a better understanding of
theconsiderations you should make when choosing to lease or buy, as well as a
basicunderstanding of the most common terms and conditions of a lease and your rights
andresponsibilities as a potential lease customer.Some Facts About LeasingLeasing has
exploded in recent years, with individual consumers accounting for the bulkof the
increase.It has grown more than tenfold in less than a decade and now accounts for more
than27% of the 15 million-plus vehicles sold in the United States. Why the dramatic
upsurgein leasing?A decline in the percentage of disposable savings of Americans and
changes to the taxlaws are the main causes. In 1987, more than 70% of disposable
savings was availablefor the purchase of consumer goods. By 1993 that figure had
declined to less than 40%.And this year, the percentage continues its downward slide.
Additionally, the many taxdeductions that favored purchasing over leasing were
eliminated. Since those tax lawswere changed, leasing has enjoyed a steady 2% to 3%
increase per year for about thelast ten years.www.leaserite.com/introduction.htmlStudy
Notes: Business Finance & AccountingIntroduction to hire purchase and
leasingIntroductionThe acquisition of assets - particularly expensive capital equipment is a major commitment formany businesses. How that acquisition is funded requires
careful planning.
12. Rather than pay for the asset outright using cash, it can often make sense for
businesses to lookfor ways of spreading the cost of acquiring an asset, to coincide with
the timing of the revenuegenerated by the business.The most common sources of medium
term finance for investment incapital assets are Hire Purchase and Leasing.Leasing and

26. hire purchase are financial facilities which allow a business to use an asset over afixed
period, in return for regular payments. The business customer chooses the equipment
itrequires and the finance company buys it on behalf of the business.Many kinds of
business asset are suitable for financing using hire purchase or leasing, including:- Plant
and machinery- Business cars- Commercial vehicles- Agricultural equipment- Hotel
equipment- Medical and dental equipment- Computers, including software packagesOffice equipmentHire purchaseWith a hire purchase agreement, after all the payments
have been made, the business customerbecomes the owner of the equipment. This
ownership transfer either automatically or on paymentof an option to purchase fee.For tax
purposes, from the beginning of the agreement the business customer is treated as
theowner of the equipment and so can claim capital allowances. Capital allowances can
be asignificant tax incentive for businesses to invest in new plant and machinery or to
upgradeinformation systems.Under a hire purchase agreement, the business customer is
normally responsible for maintenanceof the equipment.LeasingThe fundamental
characteristic of a lease is that ownership never passes to the businesscustomer.Instead,
the leasing company claims the capital allowances and passes some of the benefit on
tothe business customer, by way of reduced rental charges.The business customer can
generally deduct the full cost of lease rentals from taxable income, asa trading expense.
13. As with hire purchase, the business customer will normally be responsible for
maintenance of theequipment.There are a variety of types of leasing arrangement:Finance
LeasingThe finance lease or full payout lease is closest to the hire purchase alternative.
The leasingcompany recovers the full cost of the equipment, plus charges, over the period
of the lease.Although the business customer does not own the equipment, they have most
of the risks andrewards associated with ownership. They are responsible for maintaining
and insuring the assetand must show the leased asset on their balance sheet as a capital
item.When the lease period ends, the leasing company will usually agree to a secondary
lease periodat significantly reduced payments. Alternatively, if the business wishes to
stop using theequipment, it may be sold second-hand to an unrelated third party. The
business arranges the saleon behalf of the leasing company and obtains the bulk of the
sale proceeds.Operating LeasingIf a business needs a piece of equipment for a shorter
time, then operating leasing may be theanswer. The leasing company will lease the
equipment, expecting to sell it secondhand at the endof the lease, or to lease it again to
someone else. It will, therefore, not need to recover the fullcost of the equipment through
the lease rentals.This type of leasing is common for equipment where there is a wellestablished secondhandmarket (e.g. cars and construction equipment). The lease period
will usually be for two to threeyears, although it may be much longer, but is always less
than the working life of the machine.Assets financed under operating leases are not
shown as assets on the balance sheet. Instead, theentire operating lease cost is treated as a
cost in the profit and loss account.Contract HireContract hire is a form of operating lease
and it is often used for vehicles.The leasing company undertakes some responsibility for
the management and maintenance of thevehicles. Services can include regular
maintenance and repair costs, replacement of tyres andbatteries, providing replacement
vehicles, roadside assistance and recovery services and paymentof the vehicle
licences.http://tutor2u.net/business/finance/finance_sources_assets_leasingintro.asp
14. Leasings EvolutionA Guide to Strategic Decision MakingBy Sudhir P.
AmembalJanuary 11th, 2011Leasing is one of the most vibrant and dynamic industries in

27. the world. It facilitates the financingof equipment and real property. It fosters economic
growth, creates employment, and enhancestax revenues. It affects every sphere of our
lives as it encompasses automobiles, furniture,airplanes, restaurant equipment,
computers, telecom equipment, medical equipment, and more.THE SIGNIFICANCE OF
LEASINGAs vibrant as the leasing industry is, unfortunately, no one in the world
accurately tracks theentire global leasing industry with reference to items such as annual
volume, portfoliobreakdown, types of asset leased, sectors leased to, performance
measures and the like. However,unofficial statistics place annual volume in excess of
US$ 1 trillion! Leasing, on a global basis,accounts for more than 20% of all capital
formation; in other words, approximately 20% of allcapital investment in personal
property (as contrasted with real property) is made throughleasing. This is solid evidence
that leasing helps fuel economic development. The industry’sspectacular growth has been
made possible not just because of the varied benefits offered bylease financing but
because it has been managed and shepherded successfully by creative leaderswho have
continually introduced new products, expanded beyond their geographical boundaries,and
displayed resilience to changing regulatory, legal and tax climates.STRATEGIC
DECISION MAKINGIndividuals at the helm are continually faced with having to make
strategic decisions such aschoosing to specialize (as versus operating as generalists),
choosing to introduce operating leases(as versus staying with finance leases), and
choosing to forge foreign joint ventures (as versusstaying on shore). Decisions, such as
these and many others, are made based on many factorsincluding how developed the
industry is in the relevant country, how competitive it is, howsaturated the market is and
how sophisticated the customers are. One of the factors mentionedabove that impacts
many a strategic decision is how developed the industry is in the countrywhere the lessor
is domiciled or where the global lessor plans to expand. This article is intendedto offer
insight into how leasing develops throughout the world and, through such insight, it
ishoped that some aspects of decision making will be facilitated. For those who are not
faced withhaving to make strategic decisions, this article will provide insight into how
leasing evolves ineach and every country in the world. Having had the privilege of
visiting over 70 leasing
15. economies over the past two decades, the author began to observe a commonality in
the world ofleasing having to do with leasing’s evolution and development.THE
EVOLUTION OF LEASINGLeasing’s evolution in some ways is no different than that
ofany other industry in the world in that leasing progresses frombeing newly born to
becoming fully developed. The diagramthat follows details the four obvious
stages.Leasing is, of course, nonexistent in some of the extremelyunder-developed and/or
politically ravaged economies such asIraq and Myanmar. It has recently come into
existence(nascent) in countries such as Rwanda. In most countries in theworld it is
evolving (emerging). These include countries in theAsian Pacific region, Latin America,
Central and Eastern Europe and Africa. Maturity suggests acondition of full
development. Leasing has matured in countries such as Australia, the U.K. andthe United
States. How the industry moves from being newly born to maturity and what causessuch
movement is best understood by reviewing the six phases of the leasing cycle. Diagram
2details the six phases.THE SIX PHASES OF THE LEASING CYCLERentals (Phase
One) have preceded the leasing product bycenturies and, even today, this industry is
extremelycompetitive and vibrant in every country in the world. Rentalsare characterized

28. by their short-term (less than 12 months),full-service nature. Full-service means that the
typicalresponsibilities of ownership – such as maintenance, repairsand insurance – are
provided by the one who rents out theequipment and not the user. At the end of the rental
contractperiod, the user returns the equipment to the owner.Modern day leasing began in
the mid 1950’s — both in theUnited Kingdom and the United States – in the form of
the―Simple‖ Finance Lease (Phase Two). The words ―Simple‖ and―Creative‖ are
words used by the author to distinguish betweenthe two types of finance leases in the
context of the evolutionof leasing. In the marketplace, both these types of leases
arefinance leases. In every single country in the world, the ―Simple‖ finance lease is the
first leaseproduct that is introduced at the industry’s birth. The product is invariably
characterized by thelessee’s intent to eventually own the equipment. The lease is merely a
financing instrument. Atthe end of the lease term, the lessee, having fully paid the lessor
through the lease rentals,purchases the equipment for a nominal amount of consideration.
As leasing is a new product, thepsychology of ownership is still very much inherent in
the user’s thought process. The lessor,
16. too, intends to merely finance the equipment through a lease and is not desirous of
having theasset returned at the end of the term.Credit risk, not asset risk, is acceptable to
the lessor, as the latter requires developed secondarymarkets, which do not necessarily
exist during this phase. The lease product is almost invariablyoffered on a net basis
(opposite of full- service) in which the lessor’s services are limited tofinancing the
equipment. During this phase the market is usually rate driven and not value addeddriven.
Needless to say, spreads are generous, though decreasing of late. From a strategic pointof
view, for those seeking to cross borders, this is generally a good time to expand into
emergingmarkets — well before competition becomes too intense! For those who are on
the ground in thecountry in question, this is a good time to consider becoming value
added and thereby notnecessarily becoming victims to margin compression.Both with the
passage of time and the entry of other players in the market, the leasing industryenters
Phase Three — the ―Creative‖ Finance Lease Phase. During this phase, lessors begin
tostructure many of their finance leases and also provide the lessee with varied end of
term optionssuch as the option to renew or purchase at a fixed price.It is during this
phase, in most countries, that leasing experiences the largest growth, in terms ofboth
absolute volume and market penetration. Also, many dealers/manufacturers that hereto
haverelied on independent leasing companies begin to form their own leasing companies.
Taxauthorities and regulators, realizing the significance of leasing, take a closer look at
the industryand arrive at rules, regulations, and guidelines, meant to stimulate further
growth.This phase, too, is generally rate-focused though some lessors, based on severe
competition,begin to address the value-added aspects of leasing. These aspects may
include shortening theresponse time from the date of lease application to the date of lease
funding or bundling ofservices, such as maintenance, into the finance lease. As the
market experiences substantialgrowth, rate-focused leasing at times leads to volume
competition. Lessors begin to narrow theirspreads in a buyer’s market. Continued
narrowing of spreads causes many lessors to exit theindustry. The industry learns from
experience that it cannot remain rate driven.From a strategic point of view, this is also a
good time to enter emerging markets. Thoughmargins will have shrunk, leasing
infrastructure will be more solid — items having to do withclarity on legal and tax issues.
For the strictly domestic players this is the time to decide whetherto focus on niche

29. markets — be it by region, by asset type, by sector, by credit quality, or bytransaction
size.Phase Four, the Operating Lease Phase, comes about with the passage of time,
intensecompetition, transfer of technology from one leasing country to another, demand
bymultinational lessees, and developing or developed secondary markets. In some
countries, theproduct is fueled by the fact that finance leases are denied ―true lease‖ or
―tax lease‖ status. Theintroduction of international accounting standards further fuels
the demand for operating leasesas finance leases no longer qualify for off balance sheet
financing. Of course, forthcomingchanges in international accounting standards are likely
to jeopardise off balance sheet financingin totality. However, this does not mean that
operating leases, as a product, will disappear; they
17. will continue to offer major benefits having to do with items such as their full service
features, ahedge against the deterioration of asset market values, and any possible tax
benefits that financeleases may not offer.The key features of this product are the ability
of the lessee to return the equipment at the end ofthe lease term, and the full-service
nature of many operating leases. Bundling of services andone-stop-shopping become a
convenience to the lessee. With these features, (using computers asan example) hardware,
software, installation, maintenance, and training are packaged into onetransaction. All
mature lease economies offer the operating lease product; emerging marketshave begun
to introduce it only recently.From a strategic point of view, this is a good time to expand
overseas by offering skill base andexperience through joint ventures with those lessors
who seek to offer new products. For thoseon the ground, this is the time to decide
whether to stay with finance leases only (nothing wrongwith this as the overwhelming
majority of lessors globally successfully stay in this phase) on avalue added basis or to
consider new products.On-going intense competition, continued lessor creativity, and
ever-increasing transfer oftechnology propels the industry to Phase Five, the New
Products Phase. In this phase, theoperating lease becomes extremely sophisticated, with
complex end-of-term options (such asputs, calls, and first amendment clauses), early
termination options, upgrades and rollovers,technology refreshes, and the like.Phase Five
also brings about new products such as securitization, income funds, venture leases,and
synthetic leases (off-balance sheet loans).From a strategic point of view, now is the time
to consider domestic joint ventures and ormergers and acquisitions as the next phase maturity, will bring about flatness in marketpenetration.Finally, the industry, following
the classic industry curve from infancy to maturity, enters the lastphase, Phase Six,
Maturity. Maturity is characterized by substantial consolidation within theindustry. Such
consolidation takes the form of mergers, acquisitions, joint ventures and
alliances.Maturity also brings forth lower margins, causing lessors to look for profits
through operationalefficiencies as versus increased sales volume. Penetration flattens
during this phase, as leasingvolume increases only with the overall growth of the
economyThough the six phases apply universally, it is important to note two points. First,
the sequenceapplies to the industry in general within each country, and not to all of the
players. It is verycommon for lessors not to grow sequentially. As an example, some that
offer new products suchas venture leases may not be in the operating lease business.
Second, each phase is not mutuallyexclusive. Using the United States as an example,
though the industry has reached maturity,many lessors continue to offer only finance
leases, some only specialize in operating leases,whereas others diversify into products
such as synthetic leases.

30. 18. As emerging markets evolve toward maturity, it is critical to note that the leasing
cycle (from the―simple‖ finance lease to maturity) has become shorter and shorter. This
is obviously due toinformation sharing and technology transfer among
markets.CONCLUSIONMany factors impact the timing of strategic decisions — one of
them has to do with the evolutionof leasing. It is hoped that this article will provide
sufficient insight into the relationship betweencertain strategic decisions and leasing’s
evolution.Sudhir P. Amembal Sudhir P. Amembal is Chairman & CEO of Amembal &
Associates, the world’s most highly respected lease training, consulting and publishing
firm. Entities under Mr. Amembal’s stewardship have trained over 60,000 leasing
professionals throughout the world. As an educator, Mr. Amembal has conducted leasing
seminars in over 70 countries. As a government advisor, he hasspearheaded consultancy
projects for over 20 national governments. As an author, he hasauthored, coauthored and
published 16 leasing industry publications. Mr. Amembal is co-founderand publisher of
World Leasing News (www.worldleasingnews.com) and Global LeasingResource
(www.globalleasingresource.com) Mr. Amembal has chaired the annual WorldLeasing
Convention since 1993. He can be contacted at:
sudhir@amembalandassociates.comhttp://www.globalleasingresource.com/articles/leasin
gs_evolution
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