Leasing As A Form Of Financing
(A Case Study Of Onitsha)
Leasing serves as a versatile form of financing that allows businesses and individuals to access and utilize assets without the upfront cost of ownership. In a lease agreement, the lessee pays a regular fee to the lessor for the use of the asset over a specified period, often ranging from months to years. This arrangement is particularly advantageous for businesses seeking to conserve capital, as it enables them to acquire necessary equipment or property without a substantial initial investment. Additionally, leasing often provides tax benefits, as lease payments can be deducted as operating expenses. While the lessee does not gain ownership of the asset at the end of the lease term, leasing offers flexibility, cost-effectiveness, and the ability to stay technologically current by easily upgrading to newer equipment at the conclusion of the lease agreement.
Lease is an agreement whereby the lesser conveys to the lessee in return for rent the right to use an asset for an agreed period of time.
The rate of industrialization is very slow in the country, this may be attributed to many factors ranging from non availability of the huge capital outlay which involves and the prevalent credit squeeze and to this, our project is meant to direct the government to recognize the extent to which equipment leasing has contributed to cooperate financing and that if attention and assistance be given to the leasing industry, its role in the economic emancipation of Nigeria will be invaluable.
TABLE OF CONTENT
ii Title page
iii Approval page
iv Dedication
v Proposal
Table of content vi
CHAPTER ONE
Introduction 1
1.1 Background of the study 1
1.2 Statement of problems 2
1.3 Objectives of the study 3
1.4 Significance of the study 3
1.5 Limitation of the study 4
Reference 6
CHAPTER TWO
Review of related literature 7
CHAPTER THREE
Research Methodology 14
3.1 Sources of data 14
3.2 Method of data location 16
Reference 18
CHAPTER FOUR
Findings 19
CHAPTER FIVE
Recommendations and conclusion 20
5.1 Recommendations 20
5.2 Conclusions 21
Bibliography 22
INTRODUCTION
1.6 BACKGROUND OF THE STUDY
Lease is defined as an agreement where by the lessor conveys to the lessee in return for rent the right to use an asset for an agreed period of time.
Most writers believe that equipment leasing started in 1977, the year that bell telephone first rented in the united state. It is however clear from history and decided cases in the British House of Lords that there were some form of leasing in the 1930’s and 1804’s in Great Britain. There was however, no organized leasing business in Great Britain until 1960 when financial leasing was junded in the city of London as a new method of business finance.
In Nigeria, leasing is a little more 24years in existence. In the early days of independence, prior to the incidence of exchange controls in 1967, some equipment were leased to Nigerian lessees directly by British leasing company, following the imposition of stringent exchange control measures period which were necessary for conserve the countries foreign exchange reserves, this type of off-shore leasing arrangement was no longer possible.
1.7 STATEMENT OF PROBLEMS
Despite the enviable prospects of equipment leasing, it is still faced with some problems, which are of great concern to me, and one of the reasons for embarking on this project. The problems include:-
1. The absence of any legislation of specific codes of the operations of equipment leasing in Nigeria. Because of this the ELAN is proposing in leasing decree to form an integral part of the industrial policy for the country.
2. The absence or lack of any specific pronouncements on the tax treatment and uniform accounting standard for lessees.
3. The astronomical cost of equipment being leased due to the devaluation of the Naira.
4. The current restrictions on the total capital allowance climbable and method of determination of such claims.
5. The “Thinking out” of trained and experienced personnel is the problem of instability of economy. Equipment leasing is a risky business and so can only be Lucrative when the economy is buoyant and stable.
1.8 OBJECTIVES OF THE STUDY
(1) The research work will aim at finding out if equipment leasing has sufficiently contributed to corporate finance.
(2) The study will as well try to find out the benefits of equipment leasing.
(3) Also the research work is aimed at finding out the problems and prospect of equipment leasing both now and in the near future.
(4) Whether there is need to fix actual percentage of commercial bank fund to equipment leasing.
1.9 SIGNIFICANCE OF THE STUDY
We are aware of several suggestions about why a company should lease equipment rather than buy it. So of the reasons are sensible while some are not, at the end of the day a company should take a financing decision that optimizes shareholders value.
Actually, a lot has not been known of equipment leasing in Nigeria thus it is not very popular and still in its infancy despite the fact that the merchant banks under ELAN have in their lease portfolio N1 billion.
Therefore, the study of this project matter especially at this period when equipment leasing has been classified as a banking service under the 1990 credit policy guideless is of immense importance to the following group of persons:
1. Government
2. Individual
3. Lessors
4. Lessees
1.10 LIMITATION OF THE STUDY
The scope of my project covers the definition and classification of leases, Accounting treatment of lessees and lessors including income and expenses recognition and assets and liability reporting; treatment of specialized and complex leasing transaction including go these far because .
I could only go these far because of the following limitations.
1. LACK OF INFORMATION
The organization furnishing us with the necessary and required information did not give me all that I required because of the secrecy provision they have; it seriously limited my progress in this project. Also since the topic is partially new in most Nigerian merchant and commercial banks they could provide me with vitally little or no information as regards to the topic.
2. LACK OF FUNDS
I am really handicapped in terms of finance considering the fade that I am residing in Enugu and gathering information entails my travelling a lot which needed huge some of money.
3. TIME FACTOR
This is not left out left out either because since the time needed to produce the project is short for us to go as extensively as I could have so this limited my scope.
SHARE PROJECT MATERIALS ON:
Leasing As A Form Of Financing:
Leasing is a form of financing that involves the use of an asset for a specific period in exchange for regular payments. It is commonly used for acquiring assets such as equipment, vehicles, machinery, or even real estate. In a lease agreement, the lessor (the owner of the asset) allows the lessee (the party looking to use the asset) to use the asset for an agreed-upon period, while the lessee makes regular payments to the lessor.
There are several types of leases, each with its own characteristics and implications:
- Operating Lease: In an operating lease, the lessor retains ownership of the asset throughout the lease term. This type of lease is more like a rental arrangement. The lessee benefits from using the asset without the responsibility of ownership, and at the end of the lease term, the lessee usually has the option to return the asset, renew the lease, or purchase the asset at its fair market value.
- Finance Lease (Capital Lease): A finance lease is more akin to a purchase. The lessee effectively takes on the responsibilities of ownership during the lease term. At the end of the lease, the lessee often has the option to buy the asset at a predetermined price, often referred to as the “residual value.” Finance leases are usually for a substantial portion of the asset’s useful life and often represent a long-term commitment.
- Sale and Leaseback: In this arrangement, a company sells an asset it owns to a lessor and immediately leases it back from the lessor. This allows the company to free up capital tied up in the asset while still retaining the ability to use it. This can be a way to raise funds without selling off assets permanently.
Benefits of Leasing:
- Preservation of Capital: Leasing allows businesses to acquire assets without a significant upfront cash outlay. This is particularly helpful for businesses with limited capital resources.
- Tax Benefits: Lease payments are often treated as operating expenses, which can provide potential tax benefits compared to owning the asset outright.
- Flexibility: Operating leases offer flexibility as they allow businesses to upgrade to newer equipment at the end of the lease term.
- Off-Balance Sheet Financing: Operating leases can be structured in a way that keeps the asset off the lessee’s balance sheet, which can be advantageous for financial ratios and other metrics.
Considerations:
- Cost: Leasing can be more expensive over the long term compared to purchasing an asset outright.
- Ownership and Residual Value: In finance leases, lessees assume ownership-like responsibilities and are usually responsible for the asset’s maintenance and any decline in value.
- Commitment: Lease agreements often come with penalties for early termination, which could be a concern if business needs change.
- Depreciation: For finance leases, lessees need to account for the asset’s depreciation over its useful life.
Overall, leasing can be a viable financing option for businesses that want to acquire assets while conserving capital and maintaining financial flexibility. It’s essential to carefully analyze the terms of the lease, compare them with other financing options, and consider the specific needs and financial situation of the business before deciding whether leasing is the right choice.