Lease: A contract of lease may be defined as “A contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right to use the asset usually for an agreed period of time in return for the payment of rent.”

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Important features here are:

  1. Owner and User are different
  2. Depreciation claim is not with the user (lessee) as he is not the owner. Lessor (owner) claims the depreciation.
  3. Lease (rent) payment is a tax-deductible expense.
  4. In most transactions, asset is delivered directly to the lessee by the manufacturer/ supplier. Lessor makes payment to the supplier and receives rent from lessee in future periods.
  5. Lease funded assets do not alter Debt: Equity ratio.
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