Rents and leasing: explanation and characteristics of this atypical form of contract and the methods of leasing, financial and patrimonial.
Leasing , or financial leasing, is the most common form of purchasing capital goods for temporary use. The purchase of capital goods for temporary use is characterized by leasing, rental and loan for use contracts.
The most commonly used form is financial leasing or, more commonly, leasing .
This is an atypical contract that provides for the rental of movable or immovable property purchased by the lessor , in the form of a leasing company or a bank, at the choice of the lessee, or the user company, who assumes all risks (including the loss of the property) .
At the end of the contract, the user has the possibility of becoming the owner of the goods purchased on lease, in exchange for a set price.
Leasing is characterized by a trilateral relationship, in that the lessor company purchases capital goods from a supplier company and lends them to the user company, in exchange for the payment of periodic advance fees.
THE ADVANTAGES OF FINANCIAL LEASING
Leasing has advantages over purchasing property , such as:
- the total financing of the investment you want to make;
- it allows to know exactly the costs related to the operations, since the periodic fees are defined with certainty , while in the purchase of ownership the operating income of the capital goods is given by the depreciation quotas, which are uncertain;
- there is the complete deduction of the fees and costs pertaining to the financial year;
- leasing fees are payable during the contract, while in the purchase of ownership you have to pay the purchase cost;
- it has greater ease and speed of access;
- requires fewer guarantees;
- It also allows you to have technologically advanced goods.
LEASING METHODS
As regards the accounting of the company that purchases the assets on lease, the representation of the operations can take place through the financial method or through the equity or fee method .
By using the first procedure , at the time the contract is signed, the company must register the value of the asset among the fixed assets and consequently will record a debt towards the leasing company.
When you receive the invoices for the payment of the fees, the amount relating to them will be divided into a portion that will reduce the debt towards the company and a portion of interest that will constitute a cost .
At the end of the financial year, the depreciation portion of the asset will be recorded. According to this criterion, recommended by international accounting standards (IASB), it is not expected to be recorded in the memorandum accounts of the Balance Sheet compiled at the end of the financial year.
This method is mainly used by listed companies and banks.
The second criterion, the most widespread, is limited to recording the invoices relating to leasing fees . It requires that the total amount of fees to be paid be recorded upon signing the contract.
At the end of the financial year, any accrued income arising from the advance payment of a fee spanning two financial years or from the payment of a maxi-fee, or a substantial initial payment, followed by a certain number of periodic fees of a more modest amount, must be recorded.
With this criterion, the amount of the fees still to be paid added to the redemption price of the asset must be recorded in the memorandum accounts .
- Any accrued income on rent will appear in the balance sheet ;
- in the order accounts the sum of the price of the goods and the still missing fees;
- in the income statement, leasing fees will be recorded under costs for the use of third-party assets;
- in the explanatory notes , which have the task of clarifying, completing and analysing the contents of the balance sheet and the income statement, there will be a specific table which will show the current value of the unexpired rent instalments and the amount according to which the leased assets would have been recorded at the closing date of the financial year, with separate indication of amortisation, adjustments and write-backs which would have been inherent to the financial year
