Q1 Write short note on Cross Border Leasing.
Answer:
Cross-border leasing is a leasing arrangement where lessor and lessee are situated in different countries. This presents significant additional issues related to tax avoidance and tax shelters.
A major objective of the cross border leasing is to reduce the overall cost of financing through utilization by the lessor of tax depreciation allowances to reduce its taxable income. The tax savings are passed through to the lessee as a lower cost of finance. The basic prerequisites are relatively high tax rates in the lessor’s country, liberal depreciation rules and either very flexible or very formalistic rules governing tax ownership.
Other important objectives of the cross border leasing include the following:
1. The lessor is often able to utilize nonrecourse debt to finance a substantial portion of the equipment cost. The debt is secured by among other things, a mortgage on the equipment and by an assignment of the right to receive payments under the lease.
2. Also depending on the structure, in some countries the lessor can utilize very favorable “leveraged lease” financial accounting treatment for the overall transaction.
3. In some countries it is easier for a lessor to repossess the leased equipment following a lessee default because the lessor is an owner and not a mere secured lender.
4. Leasing provides the lessee with 100% financing.
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Q2 Distinguish between Financial and Operating lease. Or What are the salient features of Financial and Operating lease?
Answer:
Q3 What is Sales and Lease back leasing?
Answer:
Leaseback, short for 'sale-and-leaseback,' is a financial transaction, where one sells an asset and leases it back for the long-term; therefore, one continues to be able to use the asset but no longer owns it.
After purchasing an asset, the owner enters a long-term agreement by which the property is leased back to the seller, at an agreed rate. One reason for a leaseback is for the seller to raise money by offloading a valuable asset to a buyer who is presumably interested in making a long-term secured investment.
Q4 What is Sales Aid Lease?
Answer:
Sale aid lease: When the leasing company (lessor) enters into an agreement with the manufacturer of the equipment, to market the latter’s product through its own leasing operations, it is called “sales-aid-lease”. Leasing company gets a commission from the manufacturer on such sales.
Q5 What are the advantages and disadvantages of leasing?
Answer:
Advantages
• 100% Financing
• Protection against obsolescence
• Off-balance-sheet financing
• Tax advantages
• Leasing Increases Lessee's Capacity To Borrow
• Absence Of Restrictive Convenience
• Flexible requirements according to user needs
Disadvantages
• Cash outflow soon after the acquisition of asset
• Seller’s warranty may not be there
• Hypothecation by bank
• High cost of financing
Q6 Write short notes on Internal Rate of Return Analysis of lease evaluation
Answer:
✓ Under this method there is no need to assume any rate of discount. To this extent, this is different from the former method [Present Value Analysis] where the after-tax cost of borrowed capital was used as the rate of discount.
✓ The result of this analysis is the after tax cost of capital explicit in the lease which can be
compared with that of the other available sources of finance such as a fresh issue of equity
capital, retained earnings or debt.
✓ Simply stated, this method seeks to establish the rate at which the lease rentals, net of tax shield on depreciation are equal to the cost of leasing.
✓ In Internal rate of return analysis Leasing is compared with buying an asset from retained earnings.
Q7 Write short notes on Bower-Herringer-Williamson method of lease evaluation
Answer:
This method segregates the financial and tax aspects of lease financing. If the operating advantage of a lease is more than its financial disadvantage or vice-versa lease will be preferred. The procedure of evaluation is briefly as follows:
1. Compare the present value of debt with the discounted value of lease payments (gross), the rate of discount being the gross cost of debt capital. The net present value is the financial advantage (or disadvantage).
2. Work out the comparative tax benefit during the period and discount it at an appropriate cost of capital. The present value is the operating advantage (or disadvantage) of leasing.
3. If the net result is an advantage, select leasing.
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