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What are the different types of leases?
Following are the different types of leases:
1) Financial lease is a method of raising finance to pay for assets. It is also known as capital lease. It is a commercial agreement between Lessor and Lessee. In financial lease, the lessee or the borrower selects an asset and the lessor purchases that asset and gives it to the lessee. In this way lessor acts as a financier of the assets borrowed by the lessee. The lessee will have to use that asset during the lease period and will have to pay for the cost of repairs, maintenance and insurance of the asset. The lessor is the legal owner of the asset during the period of lease and recovers a major part of the cost of the asset plus interest earned from the rental paid by the lessee. As the lessee assumes some risks of the ownership and enjoys some of the benefits. He has the option to acquire ownership of the asset by paying a nominal price which is the ‘repurchase price.
2) Operating lease is a lease contract which has a smaller period of time compared to the useful life of the asset being leased. In this contract, two parties are involved i.e. lessor and lessee. It is commonly used to acquire asset on short term basis. In this lease contract, lessor selects and purchases the asset and allows the lessee to use the asset but do not transfer the ownership in the asset. After the lease period is over the lessee returns the assets to the lessor. The lease rent paid by the lessee does not contain any part towards the cost of the asset. He only bears the cost of repairs, maintenance and insurance of the asset. Since the lessee does not assume the risk of ownership, the lease expense is treated as operating expense.
3) Sale and lease back is a financial transaction in which the lessee purchases the asset of his own choice and sells the same to the lessor. As soon the asset gets transferred, the ownership of the asset gets transferred to the lessor. Lessor then leases out the same asset to the lessee. This type of lease is practically found in case of some old assets.
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