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Leasing Glossary

Term Explanation

  • Lessor - The lessor is the party to a leasing contract which owns the equipment and entitles the lessee to use it for a specified period of time, in exchange for specified lease payments.
  • Lessee - The lessee (borrower/client) is the party to the contract which receives the right to use temporarily the leased asset against the payment of lease installments
  • Lease payments - A number of periodic payments for a specified period of time paid by the lessee to the lessor.
  • Financial leasing - Financial leasing is mid or long-term financing. This is a contract where the lessor transfers most of the risks and rewards associated with the ownership of the asset to the lessee. Although the lessor maintains ownership over the asset, the asset is booked and depreciated by the lessee. In terms of taxation, the lessee is allowed to deduct depreciation and interest costs from its taxable profit.
  • Operational leasing - Unlike financial lease, operational lease is short-term lease and it normally does not cover the full economic life of the leased asset. The lessor bears all risks and rewards, connected with the ownership of the equipment, and provides to the lessee maintenance services for the leased machines and equipment. In terms of taxation, the lessee is entitled to deduct the full amount of the lease installment from its taxable profit.
  • Leaseback - The transaction where a company sells an asset which it currently owns, to a lessor and it enters simultaneously into a leasing agreement with the same lessor as a lessee of the same asset.
    Lessee’s objective is to improve its financial status through recovering part of the financial resource, invested in production, and transfer it to other spheres. Leaseback provides an opportunity to lessees to choose the tax regime, which is mostly suitable for them.
  • Subleasing - Leasing is sometimes done not directly, but through an intermediary. In a subleasing scheme a basic lessor (e.g. a leasing company) leases assets to an intermediary (e.g. a rent-a-car company), which in turn sub-leases these assets to the lessee (e.g. an individual). In this case, usually all risks of non-payment from the end-user are for the account of the intermediary.
  • Vendor leasing - A working relationship between a leasing company and a supplier (vendor) to provide financing in order to stimulate the vendor's sales. The leasing company offers lease contracts to the vendor's customers and handles the administration of the leasing contract (credit checking, tax payments, billing, etc). Depending on the 2nd hand market price of the equipment the vendor may required to provide a repurchase (buy - back) agreement, according to which the vendor agrees to repurchase the leased equipment in case of a default on behalf of the lessee.
  • Leased Asset - Assets which are suitable for leasing usually meet the following characteristics: long useful life, identifiable, marketable, movable, and useful to many users.
  • Delivery value - The price of the asset with all taxes, transportation costs and customs duties included.
  • Down payment - A percentage of the delivery value, which is being paid by the lessee at the time of signing of the leasing agreement. While calculating the repayment schedule, the amount of the down payment is being deducted from the delivery value.
  • Leasing price - The sum of the down payment, all monthly installments, the residual value, the management fee and the interest on the financed VAT of the leasing contract.
  • Term of the leasing contract - This is the period of time, during which the lessee uses the leased asset and periodically pays leasing installments.
  • Residual value - Part of the asset’s price, which the lessee will pay at the end of the leasing contract, prior to transferring the ownership to the lessee.
  • Repayment schedule - The repayment schedule is an inseparable part of the lease contract, which contains the amount of the lease installments and the respective repayment dates.
  • New assets leasing - The equipment has not been used before it is being leased.
  • Used assets leasing - The object of the leasing is used equipment with entirely preserved consumer qualities. Normally, the equipment is being repaired before secondary leasing, and it requires valuation by an independent expert.
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