Report on Lease Financing

pic pic Course code F-201 Course title Financial be -2 Submitted to Tahmina Akter Lecturer Department of finance University of capital of Bangladesh Submitted by Name deplume Section Md.Mostafa Kamal 16-058 B Md.Sakib Bin Abdul Hannan 16-096 B Md. MehdiHasan 16-112 B Parvaj Mosaraf 16-140 B Belal Hossain 15-132 B BBA 16th Batch Department of Finance University of Dhaka Date of resignation 26-05-2011 Letter of Transmittal Date 26th May, 2011. To Tahmina Akter Lecturer Department of Finance University of Dhaka Subject Submission of narration A account on lead pay. Dear Madam,We ar p removed to submit the line you score assigned to us. The cogitation penning was to modernize the con aspectration study on the t obliterateency named Financial Accounting-2 Course F 201, as a part of our academic activities. This is the report on A level on subscribe financing. The report re judgements that ho w leasing compe very(prenominal) involve equipment. And we throw focused a specific select discernment of unify Leasing Company with Delta Pharma trammel to have the real experience. We tried our best to situate this report a fault free, tho it is non possible. We hope that you leave behind take any mistake with kind consideration. Thank you. Sincerely Mostafa Kamal (On behalf of the group-) Contents AcknowledgementThis report entitled A Report on Lease financial support is submitted as the requirement of a part of the study of Financial Accounting-2 in the BBA design conducted by Department of Finance, University of Dhaka. To prep be this report an intensive study was do covering various statusinologies with the help of books named Intermediate Accounting by Donald E. Kieso and Weygandt. At first we want to pay our gratitude to every(prenominal) mighty every(prenominal)ah for preparing the report success amply. We are extremely grateful to our honorable course tea cher Tahmina Akter, lecturer, Department of Finance, University of Dhaka for her painstaking guidance, suggestion and all type of support & super romance to prepare this report.She continuously reminded us for the preparation of this report paper and finally gave a out-line to write down the paper spending her valuable m. Without her untiring efforts, utmost of this report paper would have been impossible. We wish to give thanks in particular to our friends and many individuals, for their enthusiastic encouragements and helps during the preparation of this report us by communion ideas regarding this subject and for their assistance in typing and proof reading this manuscript. decision maker Summary Lease funding is the most important issue that determines the stress of pecuniary behavior in an giving medication, a fiscal level of effort, and the administrations level of persistence in the face of obstacles of opposite types of support.Now-a-days pick out financial sup port is the most emphasized topic to any challenging first appearance or organization to develop their financial resources as well as profit maximization or maximization of owners equity. Lease pay is so central to management because it explains why it is better for the organization to gather financially solvency by mesh support. By term of a deoxidize support an organization tolerate reach its specific destination. If an organization has effective pack support efficiency it throne survive & develop quickly than others. At first an organization considers consider pay and other financing hand in glove with one some other then it takes decision to apply prosecute financing or other financing whichever is best. If other financing is the best than the demand financing then it will be selected, non take aim financing.So from this comment it will be clear that lease financing moldiness be selected it is non necessary. So which is the best is considerable matter. Backgro und of the Report As a Part of Financial Accounting-2 course, we have prepared this report. Our course teacher, Tahmina Akter, instructed us to prepare a report on Lease Financing. We have made a detailed and critical analysis on the topic-All the five members of our group provided their sincerity and serious effort to prepare this term paper and the term paper submitted today 26th May, 2011. Objective of the Report The main objective of our term paper is to show the lease accord of a leasing company.We have study virtually gain of leasing, various features of leasing but while preparing this report we have understood how leasing is important for company. Methodology and sources of breeding The term paper is written by using secondary resources. To prepare this term paper I have taken the help of legion(predicate) books, calculating tool lab of cable faculty of university of Dhaka. In this term paper I sorted information shortly and to collect information we went to compute r lab and central library of Dhaka University. Besides I have also collected information through numerous sources such as The Daily Star and other daily news papers, journals etc. inductionA lease is a take in whereby the owner of an addition (the lessor) grants to another(prenominal) party (the lessee) the exclusive right to use the plus in give way for the wages of rent. Lease financing in Bangladesh means financing accord to the methods of lease in Bangladesh. Sometimes it is more(prenominal) acceptable than others financing. Actually it is more profitable in some special sectors where other financing will be less profitable than lease financing. Most of us are familiar with lease of apartments, cars, and telephones. Bangladesh is a developing country, so lease financing is not very easy to apply here. In spite of these problems on that point are many sectors where lease financing is strictly applied.The key struggle between a finance lease and an operational lease is w hether the lessor (the judicial owner who rents out the pluss) or lessee (who uses the asset) takes on the risks of ownership of the leased assets. The categorization of a lease (as an in operation(p) or finance lease) also affects how it is account in the accounts. The classification of large transactions, such as sale and leasebacks of property, may have a signifi posteriort effect on the accounts and on measures of financial st might such as gearing. However, it is worth remembering that an improvement in financial gearing may be run intoset by a worsening of operational gearing and vice-versa. LeasingA lease is a contractual compact between two parties establishing an collection for the use of an asset in return for annual payments by the user. In a lease arrangement ? The lessor is the asset owner, who receives the periodic payments. ? The lease makes the payments to the lessor in return for using the asset. Types of leases All leases tail be categorized broadly as either operating or financial leases. In turn, financial leases wad be categorized into specific types. We will discuss the various types of leases below. Operating leases An operating lease is a short-term, stoogecelable lease. A simple example of an operating or assistant lease is a lease for telephone service. Financial leasesA financial lease is typically a long term, no cancelable lease- the opposite of an operating lease. At the termination of the lease contract, the lessee often can either reclaim the lease or purchase the asset. Features of operating leases 1. The lease is cancelable by the leasee foregoing to its expiration. 2. The lessor provides service, maintenance, and insurance. 3. The sum of all the lease payments by the lesee does not necessarily fully provide for the recovery of the assets cost. Features of financial leases 1. The lease is not cancelable by the lessee prior to its expiration date. 2. The lessee is typically responsible for service, maintenance , and insurance for the asset. 3. The asset is fully amortized over the life of the lease.Financial leases can be separate into two basic forms 1. Direct lease In the straightforward arrangement, the unswerving leases an asset it did not previously own. The besotted simultaneously signs the lease correspondence with the lessor and orders the equipment from the manufacturer. The lessor pays for the equipment, which is sent to the firm. The firm makes lease payments to the lessor based on a lease agreement worked out by the two parties. If the ask lease is from the manufacturer, then the manufacturer and the lessor are one and the resembling. 2. Sale and leaseback In this arrangement the firm sells an asset it currently owns and then leases the same asset from the buyer.Lease payments are set to return the full purchase price plus a rate of return deemed reasonable. The advantage to the lessee is that it allows the firm to continue using the asset while providing interchange th at can be used elsewhere. It has become more and more more common in recent age for companies to lease equipment. all(prenominal) leasing agreement needs to be read through carefully to sympathize the call and conditions within said lease. Typically a lease can run anywhere from one to five years. Most equipment necessary in commercial businesses today, including technical equipment, can be leased. Some leases provide an natural selection to then purchase the equipment at substantially less money when at the end of the term of the lease.By leasing equipment, if structured properly, you can maintain your confidence availability, as the lease debt does not have to be considered a direct liability on your financial statements. This is advantageous, as it does not limit your ability to borrow from lending sources. Advantages of lease financing ? It offers fixed rate financing you pay at the same rate monthly. ? Leasing is inflation friendly. As the be go up over five years, you still pay the same rate as when you began the lease, therefore making your dollar stretch farther. (In addition, the lease is not connected to the success of the business. Therefore, no matter how well the business does, the lease rate never changes. ) ?There is less upfront change outlay you do not need to make large cash payments for the purchase of needed equipment. ? Leasing better utilizes equipment you lease and pay for equipment only for the time you need it. ? There is typically an natural selection to buy equipment at end of lease term. ? You can keep upgrading as new equipment becomes available you can upgrade to the latest models each time your lease ends. ? Typically, it is easier to obtain lease financing than loans from commercial lenders. ? It offers potential task makes depending on how the lease is structured. genius of the reasons for the popularity of leasing is the steady stream of new and improved technology. By the end of a calendar year, frequently of yo ur technology will be deemed dinosaurs. The cost of continually buying new equipment to meet changing and growing business needs can be difficult for most small businesses. For this reason leasing is very advantageous. Leasing can also help you enhance your status to the lending lodge by improving your debt-to-equity and earnings-to-fixed assets ratios. There are a variety of ship canal in which a lease can be structured. This provides greater flexibility so that the lease is structured to best accommodate the individual cash flow requirements of a specific business. For example, you may have balloon payments, timber up or step down payments, deferred payments or even seasonal worker payments. The actual advantages of leasing The most important reason for leasing remains the tax reason.This advantage exists because firms are in different tax brackets, allowing a firm that can not take full advantage of a potential tax shield to shift such a shield to another firm. If the lease pa yments are set at proper rate, the firm that does the transferring can benefit, as can the lessor. Although someone has to lose, that someone will be the IRS. Disadvantages of lease financing Leasing is a preferred means of financing for certain businesses. However it is not for everyone. The type of industry and type of equipment required also need to be considered. Tax implications also need to be compared between leasing and purchasing equipment. You have an obligation to continue making payments. Typically, leases may not be all over before the original term is completed. Therefore, the renter is responsible for paying off the lease. This can pose a major financial problem for the owners of a business experiences a downturn. ? You have no equity until you decide to purchase the equipment at the end of the lease term, at which point the equipment has depreciated significantly. ? Although you are not the owner, you are still responsible for maintaining the equipment as specified by the terms of the lease. Failure to do so can prove costly. A lease involving a third party that lends the lessor part of the funds ecessary to purchase the asset to be leased. 1. Equipment manufacturers Durable-goods manufacturers often establish subsidiary leasing or credit companies. angiotensin converting enzyme of the main reasons that manufacturing companies provides lease financing is to encourage the use of their product. 2. Financial institutions Banks, avow holding companies, and life insurance companies. These institutions are heavily involved in long-term financial leases. From their standpoint, leases are merely a secured lending. 3. Independent leasing companies This provides much of the direct leasing. The financing effect It is a form of borrowing. The contractual agreement on the lease payments is no cancelable.Therefore as other types of debt, failure to make the lease payments can result in bankruptcy. Both lessors and lessees generally, and correctly, view a financial lease as a form of borrowing. Leasing is similar to debt it has an impact on the amount of borrowing a firm can do. Generally, the more a firm leases, the less it can borrow. This debt displacement is an understood cost of leasing. The tax effect For tax purposes, the lease is entitled to a full deduction of all qualified lease payments. Therefore, like other forms of borrowing, the government subsidizes the cost of leasing. The describe effects Leasing used to be referred to as off-balance sheet financing. on a lower floor rior accounting practices, because the firm did not own the asset, incomplete the asset nor the companion lease liability had to appear in the em automobile trunk of the balance sheet. A footnote reference, often a very short(p) one, was sufficient. The superficial effect was to understate the firms indebtedness position. Lessee reporting The capitalized revalue of capital leases and their companion liabilities are put in the body of the lessee s balance sheet. These capitalized values are the present value of the lease payments. Thus the present value of the lease payments appears on the right-hand side of the balance sheet as a liability and on the left field side as an asset. picULC was established in 1989 as a reality limited company, to cater the investment needs of our economy. ULC provides lease financing facilities to all market segments of customers, Small & Medium Enterprises, Commercial Houses, Large Corporate organizations. Under Lease financing They provide ? Industrial machinery and motor vehicles at concessionary term. ? Machinery and furniture for Hospital use. ? Truck or Bus for Transportation. ? Equipment or Furniture for formalized use. Delta Pharma Limited (DELTA PHARMA) has been propelling steadily towards its goal ( reveal Care Better Cure ) since its launch on November 21, 2004. It is a public limited company. VissionThe vision is to reach a level of excellence in pharmaceuticals through a sustaine d effort to quality assurance and to achieve a planetary standard through the indoctrination of a culture of excellence. Mission Our mission is to benefit people and improve their quality of life through our quality products. As a generic company, our growth is closely knitted to the satisfaction of our customers. We would like to ensure customer satisfaction through providing quality medicine at affordable cost, launching new molecules & expediting export to all possible avenues. We are committed to achieving our goal through skilled, creative, and motivated employees.ULC agrees to lease a drug manufacturing machine to Delta pharma company on January 1, 2010. ULC has added following information in the contract 1. The lease agreement is noncancellable in nature with 6 years time period. 2. There will be no renewable option after lease term. 3. The cost of the machine was tk. 245000 and the fair value of the machine at January 1, 2010 is tk. 245000. 4. Machine will be reverted to t he leesor at the end of this term at which time the machine will have scrape value worth tk. 43622 which is ungurrenteed. 5. Delta Pharma will bear the responsibility all executive director cost. 6. ULC requires equal rental payment annually beginning January 1, 2010. 7.Collectability of the lease payment is reasonably predictable. There are no uncertainties surrounding the amount of cost yet to be incurred by the ULC. Required calculation by ULC rental payment calculation Fair market value of the leased asset to lesor tk. 245000 Less Present of the ungurenteed residual value tk. 24623. 31 (43622X. 56447) Amount to be received through lease payment tk. 220376. 69 Six periodic lease payment (tk. 220376. 69/4. 79079) tk. 46000 United Leasing Company (Lessor) Lease amortisation Schedule Date Annual lease payment plus participation on lease Recovery of lease Lease due URV receivable receivable 1-1-10 245000 1-1-10 46000 46000 199000 1-1-11 46000 19900 26100 172900 1-1-1 2 46000 17290 28710 144190 1-1-13 46000 14419 31581 112609 1-1-14 46000 11261 34739 77870 1-1-15 46000 7787 38213 39657 1-1-15 43622 3965 39657 0 Journal entries for ULC Journal entries given by the United Leasing Company for the first two years Date Journal Amount(tk) 1-1-10 Lease receivable. . Dr 245000 Equipment.. Cr 245000 1-1-10 Cash. Dr 46000 Lease Receivable Cr 46000 12-31-10 engross Receivable.Dr 19900 Interest Revenue. .. Cr 19900 1-1-11 Cash.. Dr 46000 Lease Receivable Cr 26100 Interest Receivable. Cr 19900 12-31-11 Interest Receivable.Dr 17290 Interest Revenu. . Cr 17290 Findings Analyzing this report we have come to terms 1. Lease plays an important persona for business. 2. Easy for business to get lease. 3. Lease agreement may see less restrictive provisions than other debt agreement. 4. credit line finds leasing cheaper than other forms of financing. 5. Business does not report an asset or liability for the lease agreement for financial repor ting purposes. 6. It is a contractual agreement. 7. It may be cancellable or no cancellable. 8. Leasing provides business an opportunity to transfer tax benefit to another party.The leasing market is becoming more competitive because of the new leasing companies are go in the market. However, There are still leasing companies are doing well. The political stability and boilers suit economic development is an essential precondition of the smooth growth of this sector. If we can ensure these two preconditions, the leasing sector of Bangladesh would be able to perform a strong role in our industrial development. If we disuses more and more about lease financing, and if we try to spread it among our general public about its advantages, we will go clearly ahead. It is very favorable to apply lease financing in Bangladesh. From above discussion, it is clear that, in many sectors lease financing is better than other financing.If we know about lease financing properly, we can use or we ca n avail all the advantages of lease financing where other financing is not favorable for us. 1. Brigham, E. F. and M. C. Ehrhardt. 2001. Financial management surmisal and practice. 10th Edition. Singapore. South- Western. 2. Bhole, L. M. 1992. Financial Institutions and Markets structure, growth and Innovations. 2nd Edition. New Delhi. Tata- McGraw-Hill Publishing Company. valuation of students performance 3. Horne, J. C. 1999. Financial Management and Policy. picpicpicpicpicpicpicpicpicpicpicpicpic Bibliography 05 06 07 07 07 08 09 11 13 18 21 22 22 1. Acknowledgement 2. Executive Summary Background of the report Objective of the report Methodology and sources of information 3. Introduction 4. Lease Financing 5. Advantage and disadvantage of leasing 6. Sources of lease financing 7. A lease contract 8. Findings 9. Conclusion 10. Bibliography TOPIC PAGES A Report on Lease Financing Conclusion The effects of leasing on the firm A Lease contract of United Leasing company with Delta P harma Limited Sources of lease financing Leveraged lease Advantages and Disadvantages of Lease Financing for Businesses Lease Financing pic (Lessee) pic (Lessor)