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40LEASING AND ITS ADVANTAGES FROM CONVENTIONAL LEASE RELATIVELY
Luarsabishvili M.,
Academic Doctor Of Economics, Affiliated Asssociate Professor Of New Higher Education Institute-Newuni
Georgia, Tbilisi
Shamugia A. Academic Doctor Of Economics, Affiliated Assistant Professor Of New Higher Education Institute-Newuni
Georgia, Tbilisi
Abstract
The restoration, development and prosperity of Georgian economy requires significant investment, which is almost impossible due to its limited financial resources. The way out of this situation is development of leasing relations.
The relevance of research topic is determined by its practical purpose. It is important to determine an advantages of leasing arising from the characteristics of leasing as a finance lease. Leasing dates back to time immemorial and people have known it by many names, including leasing and renting. The lease agreement is very similar in nature to an obligations of other legal entities. In the scientific literature, the most heated discussion is the question of equating a lease agreement with a Leasing agreement. It is necessary to form a unified approach that will contribute to development of this institution.
A number of criteria set out in an article allow us to distinguish between "leasing" and "lease" - two different legal categories of obligations. Based on the materials used, our mutual opinion clearly reveals the purpose and possibilities of leasing as a legal entity, which leads to the discovery of similarities and differences between financial and operating leasing. And between the lessee, an approaches to accounting for financial leasing and conventional leasing there are analyzed by an authors.
An article discusses the practical situations that would typically lead to the classification of a lease as a finance lease, individually or in combination, the recognized advantages of leasing derive from the characteristics of leasing as a finance lease.
Keywords: Leasing, Investments, Lease.
At the present stage, agricultural enterprises are operating in an extremely difficult environment, which is characterized by globalization, intensification of competition, technological innovations, etc.
People still in the distant past thought of a good life, took care of themselves, bought and sold. Leasing dates back to 18th century, still in the kingdom of Babylon. In ancient times, leasing worked in the following way: If a soldier decided not to cultivate the land he received from the kingdom in exchange for military service, he would donate the land to a so-called "leasing company", which in turn would temporarily transfer the land in exchange for a systematic income. Leasing is more or less like rent. It's just that in this case, instead of the landlord and an employer, there are other characters here - the company and its customers, which from an operational point of view completely changes the picture and introduces new principles in the relationship. The employer no longer has to search for individual landlords and then meet and negotiate with them. He can apply directly to the leasing company, which already owns the real estate, equipment or transport he wants, and use the product for a certain period of time [3, p.59].
Leasing is an important form of property relationship that involves the transfer of property to a customer after purchase from its manufacturer. The main participants in the leasing relationship are: first, the lessor (owner) of the property, who transfers this property to
the lessee on the basis of the leasing agreement; Second, the lessee, who may be a legal entity of organizational-legal form; And, third, the property producer, who acts as the intermediary for the property owner e.g. For the lessor in the role of property buyer. In economic terms, leasing means investing cash on a return basis. That is, the issuance of a leasing object to the lessee on the condition that he, together with the invested funds, will receive income in the form of a commission for the services rendered by him. This type of financial relationship is the same as a credit relationship, and insofar as the borrower and the issuer use capital not in cash but in commodity, it is an effective form of investment. Therefore, the content of the lease can be characterized as a loan that differs from a traditional bank loan in that it is accepted by the lessor in the form of use of the property e.g. In some form as a commodity credit [6, p. 37].
A leasing agreement, in its essence, is very similar to other legal entities with obligations. The discussion in the scientific literature is the most acute in terms of equating lease and lease agreements. What connects these two institutions and what are their main distinguishing elements? In the first stage it is better to consider their terminological inaccuracy.
The term "lease" is derived from the English word "lease" and means the taking / transfer of property for a fee or rent. We will meet adequate concepts in other European countries as well: in Georgian - "rent", "lease"; In German - mitvertag, kredit; In Italian-
credito arrendamiento [7]. Terms referring to such operations will be found in other, non-European languages as well, for the simple reason that descriptions of rent operations are found on Sumerian clay tablets and in the laws of Hammurabi [5], not more than a thousand years ago. Nevertheless, in most cases, the term is used in most countries„Leasing", than the corresponding equivalent of the country.
"Lease" and "leasing" are in themselves a different legal obligation category. The reason for the confusion of terms may also be that leasing is not a legal institution alone and its formation is strongly influenced by the opinions of economists. To better understand the benefits of leasing, let's briefly discuss the subject of the lease and the lease agreement.
A lease is an agreement between the parties under which the lessor transfers the right to use the asset to the lessee for the purpose of paying the rent or making payments, within the period specified in the contract.
The subjects of the lease agreement are natural and legal persons who own or use the subject of the lease. And, a lease agreement is a mutual agreement between the parties, according to which one party, the lessee, pays the rent to the other party, the lessor, in order to use the asset for a certain period of time [6]. Accordingly, in such a transaction, two related parties arise -one, the lessor of the property, and the other - the lessee. The person who leases the property he owns is called the lessor, and the person who leases the property is called the lessee. As mentioned above, the relationship between the lessor and the lessee is governed by the lease agreement.
Lease agreements and hence the lease relationship between the landlord and the tenant can be multi-component. Such components are: lease period, rent payment, periodicity and time of its payment, various guarantees, risks, etc. The basis for leasing classification is to determine the extent to which the risk and economic benefits associated with owning an asset are shared between the lessee and the lessee. At risk here is the possibility of receiving a loss due to non-use of the asset or moral depreciation, as well as a change in the amount of return on the asset caused by a change in economic conditions. Benefits can be thought of as the entity's probable future earnings for the life of the asset, as well as its revenue from the increase in the cost of the asset or the sale of its residual value. Therefore, based on how the risks and economic benefits associated with a leased asset are distributed between the lessee and the lessee, IAS classifies the lease relationship [10]:
❖ Financial leasing, when all significant risks and economic benefits associated with the use of the assets are transferred to the lessee, regardless of the transfer of ownership.
❖ Operating (normally) lease - A lease that cannot be considered a financial lease. If it does not provide for the transfer of all risks and economic benefits associated with actually owning the asset.
In order to determine whether this or that lease is financial or ordinary, we must first determine whether all the risks and rewards of asset ownership are transferred to the lessee. In determining the type of lease, preference is given to the nature and financial substance
of the asset use and not to the legal form of the contract. The legal form of the contract provides that the asset remains legally owned by the lessor, while the nature of the use and the commercial content take into account the many factors under which the lessee pays the lease payments, using the asset for most or most of its useful life. Consequently, he actually has an asset purchased, through borrowing. Ordinary leasing of an asset is, in essence, very different from leasing an asset, as the risks and rewards of owning the asset are not transferred to the lessee. Therefore, the conventional lease accounting approach is also very different. In particular, the asset is not recognized in the statement of financial position and instead, ordinary leases are recognized in profit or loss on a straight-line basis over the term of the lease, unless there is other more systematic and rational basis for the lease: any difference between accrued and paid payments, or accruals. The fixed asset issued during the ordinary lease remains on the lease balance. At the time of a financial lease, the lessee may not own the asset but may bear all the risks and rewards of using the leased asset if the lease term covers most of the useful life of the asset and the lessee assumes the obligation to lease the asset. Financial leasing and conventional lease accounting approaches are different:
During a finance lease: the asset is capitalized; The obligation is recognized; Financial expenses are recognized; Depreciation will be charged.
Under normal leases: the asset is not recognized; The obligation is not recognized; Total leases are reflected; Depreciation is not accrued.
Under IAS 17, a financial lease involves the transfer of all significant risks and economic benefits associated with the asset to the lessee. Ownership may or may not be transferred. Leasing relations are regulated by the Law of Georgia on Promotion of Leasing Activities. In common economic relations, leasing is governed by the Ottawa Convention on International Financial Leasing.
The criteria for recognizing a lease as a financial lease are governed by national law and are practically slightly different from each other. Financial leasing and the practice of using it, which has been established in our country in the name of leasing, is widely used around the world as a cheap and effective tool for financing. Many authors have considered the role of financial leasing as a source of funding to understand why companies choose to finance their assets through leasing rather than borrowing. Leasing is often used as a cheaper source of financing, especially for start-ups, small or medium-sized companies with low profit margins but significant growth opportunities [7].
A lease is a medium-term financial instrument for the purchase of machinery, equipment, vehicles and other assets. The underlying principle of leasing is that profit is made in the process of using the assets and not in their ownership. Leasing organizations (banks, leasing companies, insurance companies, machinery manufacturers and suppliers) focus on the ability of the lessee to generate this profit in the course of its operations.
In practice, there may be situations that usually lead to the classification of a lease as a financial lease, either separately or in combination. These are:
> According to the lease agreement, the lessee will be transferred the ownership of the asset after the end of the lease term;
> The lessee has right to purchase the asset at a price that is expected to be significantly lower than the fair value of the asset he will have at the time the right is exercised, and a reasonable belief at the outset that the right will be exercised;
> The term of the lease covers the major part of the term of the economic service of the asset, even when the transfer of ownership does not take place;
> The discounted value of the minimum lease payments at the beginning of the lease is practically the total fair value of the leased asset;
> Leased assets have a specific content and only the lessee can use them without substantial modification.
According to the IAS, the circumstances that lead to the classification of a lease as a finance lease independently or in combination with other circumstances are as follows:
❖ If the lessee can terminate the lease, he will incur a loss that the lessor will receive as a result of the cancellation of the lease;
❖ Income or loss received as a result of fluctuations in residual fair value falls to the lessee;
❖ The lessee can extend the lease for a second period, with significantly less lease payments than the market lease payment [10].
However, if other indications indicate that a substantial portion of the risks and rewards arising from the property under the lease is not transferred, then such lease is classified as operating. For example, this could happen when ownership of an asset is transferred at the end of the lease term with variable payment equal to its fair value at the moment, or when the lease payments are contingent and the lessee does not have substantially all the risks and rewards. It should be noted that in the case of a finance lease, minimum lease payments are levied - payments that are or may be required in addition to the lessee's contingent lease, service costs and levies paid, which are subject to foreclosure or are guaranteed by the lessee. Before the expiration of the term.
A financially leased asset is reflected in the lessee's balance sheet even if the lessee does not transfer ownership of the asset after the end of the lease term, which allows the lessee to deduct depreciation and fixed asset repair costs associated with the property [1].
Proof of the existence of a finance lease is the transfer of the economic benefit received from the asset to the lessee during the main part of the leasehold's economic service life so that it can repay the lease liabilities and other related financial expenses at the approximate fair value of the asset. If this type of lease is not reflected in the statement of financial position of the lessee, it means that the economic resources of the enterprise and the amount of liabilities are reduced and do not correspond to reality. It is therefore typical for a finance lease to recognize an asset in the statement of financial position of the lessee and a liability to pay the lease to be repaid in the future. At the beginning of the lease term, the lessee's related assets and liabilities should be reflected in the lessee's statement of financial
position at the same amount unless the lessee's original direct costs are added to the amount of the recognized asset.
Based on the above, it is necessary to establish the recognized advantages of leasing, which are derived from the characteristics of leasing as a financial lease. These are:
■ Reduces the demand for own start-up capital;
■ Available source of financing, usually the subject of leasing becomes a guarantee of fulfillment of the lessee's obligation;
■ Flexible financial planning tool (payment schedule agreed with the leasing company);
■ The term of the lease agreement is usually longer than the term of the loan, which reduces the volume of periodic leasing payments;
■ Maintains and practically increases the credit potential of the enterprise, as the subject of leasing is reflected in the balance of the lessee and increases its assets;
■ The legislation of a number of countries provides for the full inclusion of leasing payments in current operating expenses, which reduces the taxable profit base and improves the structure of the balance sheet [7].
Conclusion
In 21st century, leasing is much easier and faster than borrowing. In addition, it generally does not require additional collateral for real estate. Leasing can also finance all costs associated with the acquisition of an asset, including the value of the asset itself, as well as its transportation, customs clearance, insurance, installation, etc. But when choosing between a lease and a loan agreement, the full cost of both offers must be taken into account, as leasing is a much higher source of financing than a loan. However, it should be noted that compared to a loan, leasing takes less time.
Leasing, as an investment tool, is gaining importance at an increasing rate in the process of structural transformation and acceleration of the obsolete material and technical base of production. On the one hand, leasing as a form of investment activity, responds to the needs of accelerated development of material production and facilitates the employment of job seekers. It ultimately makes a significant contribution to increasing the income of the population. On the other hand, leasing relations lead to the activation of the use of private capital in the field of production, as well as significantly increase the competitiveness of small and medium-sized businesses; In particular, it contributes to the formation of the revenue part of local government budgets [2, p.78]. The formation and improvement of a leasing service mechanism for small and medium-sized enterprises requires the involvement of entities engaged in all-round scientific research and practical activities in this area of financial activity, the results of which need to be actively used at all levels of the country's economy.
Thus, leasing occupies a rather modest place in the structure of capital investments as a whole. Nevertheless, as mentioned above, it is a very effective form.
REFERENCES:
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