Financial lease - Indian Laws - General

Concept of a financial lease According to Dictionary of Accounting Finance by R. Brockington (Pitman Publishing, Universal Book Traders, 1996 at p. 136): A finance lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan. SSAP 23 required that assets held under a finance lease be treated on the balance sheet in the same way, as if they had been purchased and a loan had been taken out to enable this. (emphasis supplied) In Lease Financing Hire Purchase by Dr. J.C. Verma (4th Edn., 1999 at p. 33), financial lease has been so defined: Financial lease is a long-term lease on fixed assets, it may not be cancelled by either party. It is a source of long-term funds and serves as an alternative of long-term debt financing. In financial lease, the leasing company buys the equipment and leases it out to the use of a person known as the lessee. It is a full payout lease involving obligatory payment by the lessee to the lessor that exceeds the purchase price of the leased property and finance cost. Financial lease has been defined by International Accounting Standards Committee as a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred . Lessor is only a financier and is not interested in the assets. This is the reason that financial lease is known as full payout lease where contract is irrevocable for the primary lease period and the rentals payable during which period are supposed to be adequate to recover the total investment in the asset made by the lessor. According to Lease Financing Hire Purchase by Vinod Kothari (Second Edition, 1986, at pp. 6 7), a finance lease, also called a capital lease, is nothing but a loan in disguise. It is only an exchange of money and does not result into creation of economic services other than that of intermediation. The learned author has quoted T.M. Clark, one of the most authentic writers on the subject who defines lease and operating lease in the undergoing words : A financial lease is a contract involving payment over an obligatory period of specified sums sufficient in total to amortise the capital outlay of the lessor and give some profit. An operating lease is any other type of lease-that is to say, where the asset is not wholly amortised during the non-cancellable period, if any, of the lease and where the lessor does not rely for his profit on the rentals in the non-cancellable period. The features of the financial lease, according to the learned author are as under : 1.The asset is use-specific and is selected for the lessee specifically. Usually, the lessee is allowed to select it himself. 2.The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset. 3.Therefore, the lessee bears the risk of obsolescence. 4.The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore the lease is non-cancellable by either party. 5.The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period. 6.The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation. 7.The lessor is typically a financial institution and cannot render specialized service in connection with the asset. 8.The lease is usually full-pay-out, that is, the single lease repays the cost of the asset together with the interest. ASEA BROWN BOVERI LTD. VERSUS INDUSTRIAL FINANCE CORPN. OF INDIA- 2004 (10) TMI 325 - SUPREME COURT