Example 2 : Suppose in example 1 above, the cost of the car given on lease by X rental is ` 20 lacs. The economic life of the car is 8 years - implying that the car will create cash flow for next 8 years. Now, from the lease rental for 2 years total recovery will be ` 600,000 (` 25000 X 12X 2). In 2 years’ lease cost of car remains unrecovered. The economic life of the asset is far more so that the cost can be recovered by further leasing or selling the car. Hence, this is an example of operating lease.
The significant features of operating lease are :
- Payments by way of lease rental over the period of lease are not enough to cover the cost of leased asset.
- The lesser generally takes back the possession of the asset on the expiry of the lease period.
- The lesser bears the cost of insurance, maintenance, tax etc. of the leased asset
- The lessee has the right to cancel the lease before the expiry of the lease term.
- The lessor remains the owner of the asset in the legal and economic sense (in substance).
- Operating lease is always a tax oriented lease.
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