University of Nigeria Research Publications

Aut

hor

ONYEFULU, Edmund Iiomaonweya

PG/MBA/00/30984

Title

“Corporate Leasing as a Strategy For Improving Corporate Financial Structure” A Case Study of

Eight Quoted Companies in Enugu State

Facu

lty

Accountancy

Dep

artm

ent

Business Administration

Dat

e

December, 2003

Sign

atur

e

UNIK ORIENTAL PRINTS LTD NOS 1 & 4 COLLEGE ROAD, ENUGU.

"CORPOI<ATE LEASING AS A STRATEGY

FOR iMIDROVING CORPORATE FINANCIAL

STRUCTURE"

(A C-SE STUD?/ OF EIGHT QUOTED COMPANIES

1N ENUGU STATE)

#

BY

ONYEFULU, EDMUND 1LOMAONWEYA

REG. NO: PG lMBA/00/30984

DEPARTMENT OF ACCOUNTANCY FACUI.,I'Y OF WSINESS ADMINIS'I'RA' i'lON

UNIVERSITY OF NIGERIA, NSUKK A ICNUGU CAMPUS

(A CASE SI'UDY OF ElGI-IT QUOTED COMPANIES

IN ENUGU STATE)

'I'his is to ccrtily that this I<cscarcli Projcct has bccn !.cad and

approved by tlic undcrsigncd on bchalf of thc Department of Accountancy,

l:nc~~lty 01' I3wi11css Administratioti to Iiavc ~ i x t tlic rcqi~ircmcn~ s for the

a \ ~ a ~ d of' Maslcr of Busincss Adninistration (Ml3A) Dcgree in

.......................... Date

...................................... External Examiner

.........................

Date

....................................................................... DISAN, l~A<:UI,'1'\.' 01; BUSINESS AI)MINIS'I'RA'I'I( )N

'I'his \\wl.i is dcdici~tcd to Almighty God without whom nothing

could Iw possiblc and to my bclovcd wifc, Mrs Veronica I. Onycfulu and

I t is with utniost scrisc of npprcciation and unquantifiable gratitude

that I ackuowlctlgc tlicsc my I I I C I I ~ O ~ S and bclovcd ones: my parcnts, Late

hlr t ' I~uku \ \wkf , i c Ot lyc( i~ l~ alitl M1.s M.E. Onycfi~lu; Mr & 7drs A.O.

hl;idwhr~clii. Mr C.13. Ol~yclillu , Mr Uba N.J. Iloma, Mr G. O;/oudc and

rii)r bclovcd wifc-Vcro 1i)r tlicir unalloyed lovc and efforts towarcls me. I

# quite npp~miiatc and rcniain cvcr grateful for tthcir unpar;~llcl and

uricquallcd affcctio~l and outstanding rolcs playcd towards :ucccssful

complctiori of my ctrrrent lcvcl of ncadctiiic pursuit.

My ilntnclrsc gratitutic also gocs to my projcct supervisor, Dl< C.M.

~xrtic~icc a~ ld guidance tliroi~gliout tllc duration of this projcct \-lark. The

Hcnd's lovc of acatlcmics lnakcs things and research work easy for

students. Otlicrs arc I'v1r.s N.J. Modcbc (PC CO-OIIDINA'I'OR)

Ug\\wke and Mr V.U. Ezugwu, who are never tired giving acadermc

his

Mr

ndvicc. I nln gratcfi~l to all PG-MBA lecturers and staff who facilitated the

sircccssli~l co~iiplctio~i of my ncndcmic pursuits particularly this project, I

I o I I I I I \ \ \ I I 111y IIIIIIICI.OIIS S I . ~ C I I ~ S i\lid U'CI I - W ~ S ~ C T S

W I I O directly or i~idi~cctly contrihtcd to the succcss of this projcct.

vi

I;i~ially tllc typist who typcsct this work is equally thanked for

painstaking dcstcrity spcctl and accuracy exhibited in the course f ~ f typing

this \\lark.

h?ay (iod r-cwa~d y o i ~ , all. 'l'hank you.

Onyefulu, Edmund Ilomaonweya PG/MBA/00/30984

l311si11css c l ~ a ~ ~ g c s con~pcl Llw n~c~liod of' financing to also change,

and bccoming ~norc co~nplcx. 'I'hc known traditional methods no longer

pso\~iCIc lbr cvcry solution to all idc~ltified financial problcms.

Conscqucntly, altcrnativc mcthods have to be sought foi.. Therefore,

lin;l~~ci;ll c s p ~ r t s ~ I I V C I I I C C ~ I C I I S ~ I I ~ as rw innovative altcrnativc to traditional #

1nct11uds of' tinancing projccls. 'l'llis rcscarcli ajnis at asccrtailling how

c11;.~.ti\.cly 3 1 1 ~ 1 ~ l l i c i c ~ ~ t l y 1ci1si11g could IIC. i~tilizcd to improve the

'I'llc objccti\x ol' ~l lc study is to dc~crniinc thc best ways thc lcsscc

could use Icasc financing to improvc corporate financial structurc and how

bcst tllc factors iufli~cncing lcasc financing can be ~iianipulatcd to the

advantage of both tlic lesscc and lcssor companies. This also d2termines

\\7llat i~llluc~lcc Icssor's dccisions on thc assct(s) to stock for, ]casing are

classiticd ils sl~us(-tcsm Icasc and otllcrs long-tcrm Icasc.

'I'l1rcc Ilypotl~cscs wcrc rormulatcd to facilitate thc achic\.cment of

the objccti\lcs. I-Iypotlicscs 1,2 ;inti 3 wcrc tcstcd using chi-square and

i~ypoti~csis 3 w : ~ s f i i r t iw tcstcd using coetricient of correlation. In

hpothcscs analysis, hypo~hcsis 1 was rejected while hypothesis 2 and 3,

and furtllcr tcst of hypothesis 3 wcrc acccptcd.

u~ilinl!. t l~roi~sh e ~ i ~ e s t i ~ ~ ~ ~ ~ a i r e . orill i~i~e~~vie\vcd. reading and obscpation

\\u-c i~nal> ,s~d using chi-square tcsls and cocflicicnt of correlation.

1.cnsillg alllloi~gll lot rnorc convcnicnl f i r a firm to arrangc and

csccutc lllall olllcr soi~rccs 0 1 ' clchl li~~i~ncillg. posscsscs to a large cxtcnt

id \mlascs \\:llicl~ cl~dcal-s il lo corporate ilscrs more than thc traditional

I I I L * I ~ N ~ S 01' l i ~ i ; ~ ~ i c i ~ ~ g pro.ic~.k. WC ~ I C I V O C ~ I ~ C ~ l i i ~ ~ corporate bodies should

IISC ~ l ~ c i r C S ~ ; I ~ I ~ S I I C C I ~ro.jcct i ~ ~ ~ ~ p ( i ~ h i l i l y I I I O C I C I to cvaluatc all lcasc

trimsaction bcliwc ill~dcrtaking lllcln. 'l'his is bccausc all lcascs that satisfy

[he conlpall!.'s pro.icct i~cc~pl; lhi l i l~ t ' i l t ~ or'rcturn certainly will improvc

rllc corporate Iinancial structure.

I-irially. \vc arc very conlidcnl that though this rcporl is not v c n

c d i ; ~ \ ~ s l i \ ~ c i l \ \ , i l l lw q \ ~ i ~ ~ ~ d \ ~ ~ * a ~ i v c i111tI inIi)~ma~ivc lo collc;~gucs (:hicf'

~ ~ s c ~ ~ ~ ~ l i \ ~ c and Ill;\tlilgct'S 01' ~ o l . l ) o l ' i i I ~ I)ocIies sccki~lg 10 acquire andlor

i~npro\'c' rllcir kllo\vlcdgc OH leasing and its cll'ccts on corporatc fiinanciaI

strilclurc.

1 .O Introduction .,.......... 1

1 . \ I 1y~'Otllcscs ,*....*,....

1.4 Sigui licancc 01' thc Slildy ............

1.6 Limitation of t11c Study , . . . . . . . . . .

Ik~sic. 1'1-i~lciplcs ol 'a Ixasc and I'arlics to I.casc ...... 19

'I'ypc: of' Asscts Imscd ..... 21

'l'ypical 1;caturcs of a Lcasc .... 22

Clnssi ticationslTypes of a Lcasc .... 24

('r~sll 17ow Conscqirc~ws oS a 1;inancc Lcasc . .... 28

Myths about Lcasing .... 32

I<c.asvr~s for I..casing ..... 34

I'roblc~iis and I'rospccts of Lcasing ...... 40

LCIISCS il l the Financial Statements of Lessees ...... 42

Lcascs in t l~c Finallcia1 Statcmcnt of Lessor ..... 47

Evaluation of Lcasc Arrangcmcnts .... 51

2.15 Nct I'luscnt Value (NPV) and Nct Advantage of Leasing (NAL)53

2 . I 1:aclors to bc Colwitlcrctl in I<valilating I. casc ..... 55

2.17 I m s i ~ l g and C O I ~ I . ~ I ~ C I'crfor~liancc . ..... 57

1lk:lWlllCNCE: ..... 64

CHAP'I'ER 'l'kIIWE

3.0 Kcscarcl~ Dcsign and Methodology ..... 66

3.1 Rcsc;~rcll ilcsign .... 66

2.2 Rcscarcll Mctliodology .... 66

3.3 Soitrccs ul' Data .... 67

3.4 I'opuli\~ion of t l ~ Stltdy ..... 67

xi

...... Snmplc 3 1 ~ 1 Sampling I ' S O C C ~ U ~ C 68

...... l~lstrumcnts sf thc Sii~dy 69

...... Mcthod o f Data Analysis 70

...... 'I'cst of 1-iypothcsis 70

...... l)ctcr~~;i:!ing a d 'l'csting I . cvcl ol' Conlidcncc 71

..... ltKl~KltKNCl3S 73

c I I A I''l'I?l< 1w u I t b

4.0 Data l'rcscntation. Analysis and Interpretation ..... 74

..... 4 . I Introduction 74

..... 4.2 Distribution nnd Rctuni of Qucstionnaircs 74

.... 4 I'~.csc~itntion nntl Analysis of I<clcvant Data 77

.... 4.4 Oral I~itcrvicw 87

4. 5 'l 'csti~~g. Atl:~Iysi~~g i \ ~ i ( I In~c~y~xIing tlic I jypoth~sis ... 92

C t I A l ' ~ l ' ~ 1 ~ 1ClVlC

....... Fi~idings Conclusion and liecommcndations 110

...... Summary of Findings 110

....... Rcco~~iui~endations 113

....... Coliclusions 115

...... Suggc-stitms lbr F~~rtlicr I<cscarch 117

...... I~ibliograpl~y 118

...... Apl)e~~dices 121

distirlgirislli~lg fcaturc of a Icasc ngrccmcnt is that one party (thc lessee)

ubtirins tllc irsc of all assct for a pcriod of time, where as the legal

u\vrlcrsllip of tlrat assct ~.clnains with tlic other party (the 1c:;sor). The

Icilsing irgrccnicnt, unlikc a Iiirc-purcliasc agrecment, does not give the

# Icssw tlic right to final ownership. If a manufidcturing company is satisfied

10 I.rc ;rlrlc ti, trsc :I i~al.licill;rl.;rssct willlout owning that assct, t1ic11 Icasing is

;I possilblit y. I ~ C ~ C ~ \ V I I C (1997) 443.

Although Icnsirlg has a long origin and wide application in

dcvclopcd economics, its use i n Nigerian and othcr third world economies

scan to bc vcry rccent. In this reccnt time, it has been applied to various

types ul' busi~~css organizations. Lcasing, though, not too new alternative

s t~wturc and finirncial pclfo~~niancc of organizations. Lcasing has not very

1lrucl1 bccn used by birsillcss organizatiorrs cspccially t l ~ c mc:dium size

o~rcs, p c r l ~ p s bcc;~usc of lack ol' knowlcdgc of its modc of opct ations and

Iw\v ill1 olgarlization can sct off about it, or bccausc thcy arc sin-ply scared

of its i~pplicirtioi~. I t is also ul~dcrstood that somc users havr not been

1wqwrly csposcri to ccrtnin csscntial bcncfits it conl'crs on wcrs as tax

bc~wlits irnd cvc~i~tual tr~r11sScr 01'ow1icrsIiip of tlic lcascd propcrty from the

lessor to tlic lcsscc dcl)cliding on tl~c typc of lcasc cntcrcd into. A n cntirc

cnte~yrisc or organization with its lnovable properties could be leased out

to cntrcprcncurs who Iiavc proven track records of performance 2nd who

possess tllc ~nnnngcrial tcch~iical skills unique to the enterprise as well as

sucli lcasc \ \ ~ u l d pily only an agrccd pcrccntage of its profits to the lessor

and ilicrcasc its ovcrnll profitability. llgbuna (1995) 4.

b

I. I S'I'A'I'EMICN'I' OF 'THE PROBLEM

Whcrc it is difficult to source finance for certain types of

orga~lizntiund pujccts perhaps because of high cost of capital, lack of

rcadily availnblc cash or arms-twisting organizational bureaucral:y, lease

tllc act 01' its usc. I<cgi~dlcss 01' this, corpuratc bodics arc yet to rcap the

bc~icfi[s clilbcddcd in Icasing 11cncc this rcscarch.

1.2 OBJECTIVE OF THE STUDY

' 1 ' 1 ~ ol).jcctivcs of this rcscarch work is to X--ray the future prospects

of Ic;w i~dustry i n i1 dcvclopirlg C C O I I O I I I ~ and how bcst Icasing could be

strntcgici~lly applied to in~provc corporate financial structure. '1 he main

objci-t i1.c~ arc:-

I .

. , I I .

i i i .

'I'his s r d y \ \ t i l l bc uselill lo collcagucs (rcscarchcrs) and corporate

ti~l;\~lcial I I I ; \ I I ; I ~ ~ I . S ; I I ~ otl~cr clccisi~n makcrs including accountants and

cllicf' csccutivca of the quoted research companies, their sutlsidiaries,

nssocintcs, trntlc investors and fiicntls. I-Icncc, it will enable them to

its cy~c~' :~t io~~s, iq~plici~tions, Ixnclits, nncl I-cason(s) for its cont i~~~lcd use.

# 'I'llis \ \ * i l l nlsu p w i d c tl~c various ways Icasing can be ajqdicd in

~ \ . i \ l ;~ l~ta i~lg li~li\~lci;\l clccisions for corporntc capilal cffcctivc, c:fficicncy

arid economic performance and growth. This work will also be very

bcnc ficinl to studcnts for consultation and research purposes.

1 ,F SCOPli: 01' 'l'kIE SI'UI)Y

l'llis ~.csca~.cli work on corporate Icasing (lease financing) as a

s t ~ x t ~ g y l i ~ . i ~ u p r w i ~ ~ g co~po r ;~k 1i11mci;d stri~cturc will span for i\ p c r d

of ten (10) ycars (1992-2001). 1 will look into long-term and short-term

Icases. However, a greater proportion of it will be concerned with long -

term Icasc. Tlic meaning of long-tcrm varies with individual organizations

andl or xadcmic autlloritics.

"'l'l~c Anlcric:la lnstilutc of Certified and Public Accountants"

dclillcd i t to covcr tllosc Icnsc, which cxlcnd bcyond lhrcc (3) years.

Ilgb\~~ln (1995) I . 'l'hc Intcr clclinitici~l is what has bccn assu~ncd here,

5

~llougll this ;IN ;~rhit~.ary clioicc. Eight quotcd corporation com1:anics all

locatcd i l l E n q y state clraw~i ra~~domly as a case study and all inferences,

c ' \ ' ~ \ ~ u : I ~ ~ o I ~ s , r~c011i1nc1idatioi1~ a d conclusions arc bascd on infwrnation

collated tiom tlicsc conipanics.

l,lhll'l'A'l'lONS OF 'I ' I I IC S'I'UDY

'I'lic ~liajor limits and constraints to thc study includc:

Inadcqaatc or Nan-Respolise: This study is very much consttained

by thc cold approach or rcluctance of managers andlor chief

csccutivcs to disclosc infor~iiation concerning their operations, vital

politics a~ld p~occclwcs.

I;i~~;incc: A study ol' tlic scopc contcn~pl in this work rcquires

C ~ ) I I I I I I ~ ~ I I I C I I ~ ol' I-CSOLII~CCS lix 1icccssal.y materials for thc study and

co~n~nunication of thc rcscarch oulput to ycaning users. This is a

vcry vital constraint.

. Space 'I'inie: the acceptable volu~i~e of work required as w~;ll as the

a p p ~ ~ ~ c d rclevant pcriod within which thc work must bc completed

equally limits this study. All tlicsc and othcrs curtail thc ss:opc: and

work put into thc s t ~ ~ d y . Whilc this may bc so, it is hopec' that the

\ \ w k \ \ ' i l l still p~ 'o\~c to bc ol'son~c l~igll valuc with its scopc:

laid d o w ~ rulcs or iitlc 01' ailtliority for obtaining something or solving

psoblcms without or miniillal application of pcrsonal discretion.

C:r~~ccllntionlNo~~-cancellation clsusc: Canccllation or non-ca cella at ion

# cla~iscs i\rc clanscs includcd in a lcasc contract which givcs thc lcsscc the

option or Icgd right to dctcrmine or not to detcrminc a Icasc: contract

agrccnwllt.

<':q)it:rl c \ l low;~~~cc: 'I'llis is all allowance grantcd by a rclwmt tax

authosity to ii~vcslors for investing in equipment and industrial building to

c~lilblc tl~cln bcar tlic cost of acquisition of such assets and to cncourage

invcst~licnt. Capital allowance is usually cxprcssed as a pcrccnt;igc of the

. ('1 IA'T'I'El, RIIOIU'GAGE: l'ropcrty or things pledgcd as sscurity or

tnortgagc for n dcbt owccl.

FASB: Fiuancial Accounting standard Board.

Net Adw~nti~ge of Ic;rse (NAL): This is an accumulation of the cash flows

(both ilitlows and outflows) associated with leasing as opposed to

7

ROYAL'I'Y: Paytncnt madc to an owncr of land for a Icgal riglit to work

0 1 1 tllc I ; \ I N I or csploit ;111y I \ ~ I ~ I I I . ~ I I 1ni1w1*;11 rcswrccs in or o n the land,

1~1~~il~c11t is 111;~Ic 10 i~lvcstws li)r ~ I I C IISC his illvcnlion.

S'TRA'I'EGY: Corporate plan of action for achieving set goals.

WAS'I'ING ASSETS: Asscts that are in the form of natural mineral

rcsourccs that can be mined or extracted from the ground.

I,I<ASlr: A Icasc is an agsccmcnt whcreby thc Icssor conveys to the lessee

# i n I-ctu~-11 tbr. rent tlic right to usc an assct for an agrecd pcriod of t~me.

1;INriNC'IC I,l<ASIC: A finnncc lcasc is a lcasc that transfers sutstantially

all thc risks and ~.cwards incident to owncrship of an asset. Title may or

may not cvcnt~~ally bc transferred.

OPERATING LEASE: Operating lease is a lease other than a finance

Icasc.

NON-CANCELLABLE LEASE: A non-cancellable is a lease that is

c ;~~~ccl l ;~blc only:

I1po11 t l\c o c c ~ ~ ~ ~ c ~ l c c dl' solnc ~cmotc contingency;

With thc pel-n~ission of the lessor;

I f thc lcsscc cntcrs into a new lease for the samc or an equivalent

sssct with thc same lessor; or

Upon payincnt by the lessee of an additional amount such that, at

inception, cotltitiuntion of tlic lease is reasonably ccrtain.

8

IN<'l<lD'l'lON 0 1 ; A 1,ICASIC: 'I'llc inception of a lcasc is thc cat lier of the

chtc of' tllc Icasc agt-ccli~cnt or of a commitment by thc partics to the

principal plvvisiotls ol'thc Icasc.

LEASE TERM: The lease term is the non-cancellable period for which

tlic lcsscc Iias contsactcd to lcasc the asset together with any further terms

for wllich tlic lcsscc has thc optioli to continue to lease the assct, with or

without filrtlicr ~~ilytncnt, wl~icli option at the inception of the lease, it is

b ~~c;lsor~;~l~ly ccrlain t l ~ t lllc Icnsc will cxcrcisc.

hllN l ikl Ubl LICASE PAYMEN'J'S: Minimum lcase payrncnts are the

paymcnts over the lease term that the lessee is or can be required to make

(csclmling costs for serviccs and taxcs to be paid and be reimt)ursable to

the Icssor) togcthcr with:

A. In tlic casc of tlic Icsscc, nny amount granted by the les iee or by a

pasty rclatcd to the lesscc; or

13. 111 t l~c C;ISC ol'tllc Icssor, any ~*csid~lal valuc guaranteed to thc Icssor by

citllcr:

- The lessor;

- A party relatcd to the Icssee' or

- An indcpc~ldcnt third party financially capable of meting this

g1I:llmtcc.

1 lowcvcr, i f thc lcsscc has thc option to purchasc thc assct at a price

\\4iicli is cspcctcd to bc surticiclltly lowcr than thc fair vaIuc at the date the

option bccomcs exercisable that, at thc inccption of the Icase, it is

rc;lscmbly ccrlain that llic option will bc cxcrciscd. The minimum lease

I ~ ; I ! ~ I I I C * I I I ~ O I I I ~ M ' ~ S ~ tllc ~ i i i ~ i i ~ n i ~ l i i I . C I I ~ ; I I S payahlc ovcr thc casc tcrm and

p:~yiie~lt luli~ircd to cscrcisc this p~~rchusc option.

1 \ ' l J : Fair value is the amount for which an assct could be

exciinugcd between a knowledgeable willing buyer and a knowledgeable,

willing scllcr iri an arms-lcngth transaction.

1JSEFUL LIFE: Useful life is either: b

I 'l'lic period ovcr which a tlcj)~.cciablc asset is cxpccted to l)c used by

111c c~itcrprisc; or

h. 'I'llc ~ii~riibcr of lmdi~clio~l or similar units cxpccted to bc obtained

fi.0111 tllc assct by thc cutcrprisc.

IJNQUARANTEED RESIDUAL VALUE: Is that proportion of the

r c s i d ~ d value of the leased assct (estimated at the inception of the lease)

tllc rcalizatio~l of which by thc Icssor is not assurcd or is guaranlecd solely

by a party rclatcd tlic Icssor:

GROSS INVESTMENT I N 'THE IXASE: Is the aggreg: te of the

~ i i i ~ l i ~ l l i ~ ~ i l le:~se ~ ; ~ ~ I I I C I ~ ~ S undcr a fina~lcc lcasc from thc standp )int of the

Icssor a ~ d any ~~uguasa~itcctl ~.csiclual valw ilccrui~ig to tlic lessor

UNEARNED FINANCE INCOME: Is the difference between the lessor'

gross ilwestment in the leasc and its present value.

N I X IN\'I~S'I'R~ICPrl' IN 'I' l lF~ I,EASE is the gross invcstmt nt in the

lcasc less uucartlcd finnncc incomc.

1 1 I 1 S 1 1 N 1 : Is llic I);~liincc of' tlic cash out l lows and

inllo\\.s i l l rcspcc~ ol' tlic Ic:lsc cxclt~ding flows relating to insurance,

iiiai~itc~ialicc k~ l i c l si~liili~r cosls ~.ccl~i~~~gc;hlc to h c lcsscc'!

Tllc casli o~~tf lows include pay~ncnts ~iiade to acquire the a w t s , tax

~ ; I ~ I I ~ C ' I I I S , iili(c~.cs( ;\lid p~.i~\cip;d 011 third party financing. Inflows include

rental rcccipts, rcccipts from residual values and grants, tax cred!ts and

otlicl- tax savings or rcpaynlcnts arising from the lease.

I N I ' I S ' I ' A l M l L l C l ' l IN I L A S E : Is thc disc:ount rate

111;1t i1t 1I1c inc'cplioll ol' tlrc 1c;lsc carlscs tlic aggrcgatc prcscnt value of;

I . 'I'lic ~ i \ i ~ l i ~ i \ t ~ ~ ~ i I C ~ I S C ~ ; I Y I I ~ C I I ~ S li'o~ii tllc standpoint of'thc 1c:;sor; and

. . I 'I'lic u~ig~rarantccci rcsidual valuc, to bc cqual to tlic fair valuc of the

lcasc assct. nct of grants and tax crcdits rcccivable by the lcssor.

THE 1,ESSEES' INCREMlCNTAL BORROWING RATE O F

INTERES'I': Is thc rate of intcrcst t11c lcssce would havc to pay on a

. . slnlllar Icasc or il'that is not clctcrn~inablc, thc ratc that, at the iriseption of

tlic. Ic~isc. 111c Icssccb wo\~lcl i ~ i c \ ~ r to I,ol.~.ow ovcr a similar tcrm, ; lnd with a

~ i l l 1 i ~ : i l ' ~ ~ ~ \ l l ' i t ) f , 1 1 1 ~ ~ ~ l l l d ~ IlCCCSSiIl'j' 10 I > ~ I I ' c I ~ ~ \ s c the ~ISSCIS.

A CCON'I'INGEN'I' REN'I'AI.,: Is rcnlal that is not fixcd in anic unt but is

based oli a factor otlicr than just thc passagc of time (c.g. pcrc entage of

S;IICS, ;111i~)u1it OI 'USII~CS, priw itldiccs, and niarkct rates of intcres,).

Int~~.ll:\tion:\I Accoulltillg Sta~dards; JAS 17 ( 1 994) Accounting for

Icnscs

St:\tcn\cl\t 01' Accoi~~\ting Stn1lcla1.d~; SAS 19, ( 1996), Accounting

for Icase.

1;cni-cr J . (1985), Thc Ma~ia~cment of Business Financc, London,

# Pitma11 Publishing Ltd.

i<iiickck~vuc 1'. (1997), Corporate Financia1 M a n a m

IGnshasa-Zxia, Afi-ican Bureau of Educational Service

.\"I I l t l .

5 . Egbu~ia 1C.N. (NI1.s) (1995), "Equipment Leasing in Nigerid, Trends

and Prospects," m l i o n Publication of the C c n d

Bmk of Nigcria vol. 19, No 3 July1 Septcm1)er

Chnstciis LC, Flahcrty, R.E & O'Connor M.C (1987),

Intermcdiatc Accounting, New York, Random House

13usi1icss 1)ivision. 2'ld Ed.

I licag1~11, I L l i . ( I WH), ~;lx)i~~ldwork of I < C S C ~ I ~ C ~ I Mct11odssmcd-

I'roccclurcs Elli~gu, Institute for L)cvclopmcnt Studies. - -. - - - - -- -3

Onnw-;~, 1C.A. (1998), Introduction to Academic Research Methods,

Enugu, Gostak Printing & Publishing Co. Ltd.

~ ~ l l A l ~ ' l ' l ~ l < TWO

2 -0 l<lC\'l la:\\' 0 1i l<ICl , A r l ' l ~ ~ l ) I ,l'l'lCl~A'l'U JtJC

'l'his cl~i~plcr is meant to rcvicw thc wok of various author; who have

dcalt with tllc kcy wc:d c\f tllc topic, "Icasing and its use as an alternative

source of dcbt fina~lciilg by busincss organizations and to itnprove the

fitmcial structure of corporate bodies.

2.1 IN'1'1<01)1JCI'lON/I11 SrI'OItICAL, BACI<GROUNI) #

I,casing, a s a n inst~wicnt of corporate financing is as old as other

cot~\~c~ltional ~nctllods of dcbt linancing, its practicc datc back to 100.B.C.

liv ucrlttrt-ics, lcilsitlg was used cxtcnsivcly in conncction with :tgricultural

land. It \\.as a tool, which enabled the ruling class in the 1 8 ' ~ and 19th

ccntnrics. cvcn up to 20"' ccntury to retain control of sprawling estates

lwrclits li.vnl thc la~lrl's production and yct bc frccd frum thc actual

I . : I I - I I I ~ I I ~ ;~ctivitics.

'l'llc advcnt of indubtrial revolution and its attcndant urbanization

espadcd fiul[~crs and coinplcxity of applications of lease financing.

I'andcy (1 997) 1036.

Altl~ot~gll tllc praclicc uf Icasing datcs back into history, modcrn

Icasing ivas i~litiittcd ill tllc Unitccl Statcs of Amcrica by tax legislation in

1040s and 1950s. By lntc 1940s Icasing bccamc of intc~cst to the

: \cco~~~iting profcssio~~ tluc to tlic growi~ig nrmbcr of' tr i~nsactio~~s arising

tlicrc~~l*. I .:11111y t!! co ( 1087) 795,

Iclsitlg Iias n long origin ; I I ~ widc application in tlcvclopcd

economics but its use in Nigcria and othcr third world cconomic i seem to

bc vcry rcccnt. In Nigcria, tlic iirst lcasc transaction took placc. in early

196Os by some United Kingdom leasing companies. Leasing was not

pvpulor i l l dc\doping comtrics cspccially in thc mid 20"' ccntury because

o f low Icvcl ofcco~iomic activities. b

1Ip t i l l cat-ly 196Os, vcry Scw assets could be lcascd. 'This was

attributable to filct that tlic some investors lookcd at easing with

qy~rclic~lsio~l wl~ilc otlicrs wcrc just ignorant of what lcasing is all about.

Nunicrous commercial buildings constructed during this period of early

i l id\~st~-i :~l iz:~tio~i . cnnimct-cinlisalion and urban dcvelopment were build on

la1111 accpircd tl~rough long-term Icasc. For examplc, most mu1 tinational

t i r~~ i s \vIiic11 O ~ C I I C ~ sliops in Nigeria such as thc Royal Nigcr Company

\\.l~icll latcr bcca~llc k ~ ~ o w n ;is tlic Ilnitcd ASrican Company (UA(:), Lever

Brotlws Nigcria Plc, I'atcrson Zoclioms Plc, Banks and et-cetera, obtained

yroycrty Icascs ranging bctwccn twcnty and fifty years on which they built

tllcir filctorios, warc 11ouscs and ofjiccs, ~najority of which arc still in

esistcncc today.

111 this I - C C C I I ~ ti~iic, Icasi~ig Iias bccn applied to various types of

Iwsi~wss clrga~lizat ions. L,casi~lg, tliougli not too ncw altcrnativc wurcc of

14

dcbt t?tiaticitlg. ~~osscsscs c1lo1.111ous potcnlials for improving 11 c capital

structure and f~:~ki~icial pcrforma~~cc of organizations. Leasing ha: not very

IIIM-II IWCII w c t l ly I ~ I S ~ I I ~ S o t . l : i~~~i~, ;~I io~~s cspcci~tlly t l~c ~nu ' i i~rn s k c

OIICS, ~ 1 ~ 1 ' 1 l i l l ) ~ I > C C ~ I ~ I S C 01':

- Lack of knowlcdgc of its bcncfits

- Mode of operations;

- I-Iow an organization can set off about it.

- Tlic fact that thcy are simply scared of its application. b

Soulc uscrs Iiavc not bccn properly exposed to certain essential

bc~lctils it conrcrs likc tax rclicf and evcntual transfcr of owncrsliip of the

1cilsc.d ~)rc.~pcrty l i w ~ l l~c Icssor lo lllc lcsscc dcpcnding on lhc typc of lcasc

contracl cntcrcd into. An cnlirc cntcryrisc or organization with its movable

~xcqxrtics C O L I I ~ bc lci~scd 0111 10 C I ~ ~ ~ C ~ I ' C I I C L I I ' S who havc proven track

rccords of performance and who possesses the managerial and technical

skills ~ttiiquc to tllc cntcrpriscs as wcll as financial strcngth rcquired to

IllilllagC tllc c~llcrprisc. SLK~I ' Icasc would pay only an agrccd pcrccntagc of

its pro fils lo thc Icssor i n rclurn.

I r is in ~uwguition of' lllc imporlancc of Icasing in lhc Nigcrian

ccouon~ic ~ l ~ r \ v ~ r k , ils a vcritablc sourcc of financing, thc Federal

G o \ ~ c r ~ i ~ i ~ c ~ i l i n Ilcr 1995,"Budget of Hope" advocatcd that thcre are

ccrt:\in cntclpriscs which if lcascd to the private sector will improve their

opcrationnl cf'ficic~lcy w d yicra tc lnorc revcnuc for govcrnli~cnt. The

budgct ;~lso disclosed govct.nn~cnts' intention to vigorously pursuc its lease

financing stratcgics. Egbuna (1995 ) 3-4.

By latc 1970s, virt~tally all asscts could bc Icascd. In Nigcri;~, Icasing

is not quitc dcvclopcd or is rclativcly developing with the country. Ixasing

is still ~xstrictcd to rcal cstatc a i d officc cquipments like cornpl~te:.~ and

copiers. 111 adm~lccd cout~trics, Illc volun~c of goods purchascd compares

til\.uui.ahly with thosc lcascd. I.,casing is in a way simihr to borrowing;

howcvcr, tlicir point of dcparturc is in the ownership of the asset. One can

borrow to purchase an asset in that case, the ownership of the asset is

vcstcd on the purchaser, even through hc has to pay back thc amount

bomowcd cithcr insta!rnc;ltz./ly, or cmbloc bulk in the future. In the case of

a Icasc. tllc owtlct-ship of thc asscts docs not changc from the lcssor to the

Icsscc. I ICIICC i l l tlic C V C I I ~ or d~f'ilt~ll i n paymcnt of' thc pcriodic charges, /

t l ~ lessor t ; k s f i t l l possession and control of thc assct cvcn though the

right 01' usc of such assct has hitherto been vested on thc lessee.

Emekckwue (1 997) 443-444:

The expatlsiori of thc use of lease financing was occasioned mostly by

credit squcczc on traditional bank imd other financial institutions services,

i n c l ~ ~ d i n ~ govcrnmcnt fiscal and tnonctary politics. Duc to globa' economic

crisis and Nigeria particulnrly, bmks ad finance houscs bccamc itcrcasingly

w\villing to Ictld bccati~c of fcar of' liquidity. Egbuna (1 995) 4.

Lcasing is one of tlic tools uscd by firms in n~ceting their funding

rcquirc111ctlts. 11 is C O I I V C I ~ ~ C I I I S W I ~ C L ' o f financc Tor the acquisition of

plants atid n~acliitieries, land and building (or real estates) by firms from

tlic iiidi~idunl owlicrs or Ic;lsir~g colnpanics. Diffcrcnt authors have

vnriously dcli~icd Icasing. Ncvcr~liclcss, they say the samc thing but

di t'krcllt pc~spcclivcs. I,cgally, a lcasc is a contract of bailmcnt in which

tlierc is ii contract bctwcen an owncr and the user for the lettifig of a

spccificd asset-movable or imniovablc. This asset may be tangiYe assets

and include patent rights and cxploitatiori of natural endowed mineral

rcsourccs ol' nti individual or c o ~ i i n ~ i ~ t ~ i ty. 111 C S S C ~ C C contrael s of this

1latu1.c it~volvc tlic acquisition ol' tlic right to usc thc assct ir, letirrn for

pcriodic paymcnls undcr an nrln~~gcmcnt that is rcally an alternative to /

Iwrro\\li~~_c, lo pu~.cl~nsc tllc asscl. Also thcsc contracts do not give I isc to the

same sort o t' liability as a lomi and bccausc or this; j t was regardo1 as "off-

bnlnacc sheet financing". Einekekwue (1997) 445.

I-casing is a long-term rcntal agreement. The lessec (or the

borrower) pays sent lo t l~c Icssor (or llic owncr) for the privilcgc of using

tlic ~ ~ q ~ c r t y . l ~ i i ~ i ~ ~ ~ c i a l ~-\ccol~x~ting stsndarcls Board, (PASB), statement

NO. 13. Intcrrrrrtionrrl Accoanting S(nrrtl:~rtla (IAS), statement Na.17, and

statc~~lcnt of Acrou~iting stantlnrtls (SAS) No .I 1: dcfinc typcs of leases

and tlic accounting methods to be used in treating them. However the

-. Icasc. I hc statements have tlic same definition for lease and classes of

lcnsc tlim:

LEASlC is utl at.~.iillgctlic~lt wlicrcby tlic Icssor conveys to the lessee in

bc transl'errcd.

OlTRh'TING 1,EASIS is a lcasc orher than a finance lease. Furthermore,

a lcnsc is a scntal that illvolvcs a scrics of fixcd paytnents extcntling for a

year 01. ~llorc. A lcasc is a lbsln of cotltracti~al arrangement, whic11 subsists

L~ct\\.cctl two pct.sotls. 'Phc owtlcs or tllc Icssor, who, allows the ot'icr party,

slluulrl be noted that all thc 'authors consulted regard thc amounts paid to

tlie lessor by tlie lessee as rentals or rents. Leases are, therefore, rental

paymcnts or installnicnt periodic payments for the use of another person's

propc~ty. I'11e ~ ~ ~ c ~ i f i c r l periods llliiy bc a t ~ ~ ~ ~ ~ i l l , semi-annual, mmthly or

qitnt~tc~~ly payn~clils arc i~sually as so011 as l c m contract is cxccutcd or at

tlic c~id ol' tllc lirst lillallcinl ycas or ul'lcr a umber of trading pcriodv to

cna\)lc tllo ICSSCC I . ~ \ ~ s c !he rquit.cCj lcasc ~ u l a l . 'l'hc payments arc often

rqunl by tllcir timc span or p;\ttcrn can bc designed to mect the specified

; ~ n d pcculii~r nccds'of n ~ ~ s c r .

1,cnsc is ;I contrnct lxtwccn ;I Icssor, tlic owncr of thc asr;ct, and a

Icsscc, the uscr of tlic assct. Undcr tllc contract, the owner gives the right to

wc tlic nssct to thc uscr ovcr an ngrccd pcriod of time for a conidcration

cnllcd illc "lcnsc rcntal." 'l'hc lcsscc pays thc rcntal to thc lessor as rcgular

m d tinling ol'p;\y~ncnt 01' Icasc rcntal can bc tailorcd to tlic 1cssc~:'s profits

or c:lsh flows. In up-frontcd icascs, more rcntals are charged in thc initial

yews and lcss in tlic latcr ycars of thc contracts. The oppositc happens in

b ;~~ l i - c~ ldcd Iciws. At tllc end of tllc lcasc contract, the assct revsrts to the

Icssor, \vho is tllc lcgill owticr of thc assct. As thc lcgal owncr, it is the

Icssor not tllc Icsscc, who is cntitlcd to claim depreciation on the leased

;~ssct. 111 long-tcl-111 lcasc contracts, tlic lcsscc is gcncrally given an option

parts-prinim-y lc:iscs and secondary leases for thc purposes of lease

rcntnls. Primary leascs-provide for tllc recovery of the cost of thc asset and

profit through lcasc rcntals during a period of about four or fivc: years. A

pcqxti~nl scco~lctnry Icasc may Sollow i t on nominal Icasc rcntals. Various

Altllougll tlic lessor is the Icgal owncr of a leased asset, lhe lessee

\~c;lrs tllc risk and ci!joys t l~c ictr~i.ils. 'I'hc lcsscc bciicfi ts if the Icaxd assets

~ ~ W I X I C ' pi.~l?t:~bly, and sul'l'crs i S tlic asscts fail to pcrf'or~n.

1,c;lsing scparatcs ownership and i:sc as two economic acti\ itics and . facilitates i1c;scts LISC witlioi~t ow~icrsliip. A lessee can bc indiv dual or a

firm interested in the use if an asset without owning. Lessor.; may be

cquipnicnt nianufacturers or leasing companies that bring together the

4 ~nanufacturcrs and thc users. In USA, equipment manufactures are the

lnrgcst group of lessor foliowcd by banks. In India, Independent leasing

coliipaliics f i ) l~n L I I C 11iilj0~ groiq~ in number in the leasing industry. Banks

tugctlicr \\)it11 litiailcial inst i t ut ions such as tlic Industrial Credit and

lnvcst~ncnt Corporation oT India, arc the largest group in tcrrns of the

\wlumc of business. Pandcy (2000) 1038.

2.3 BASIC PRINCIPLES OF A LEASE AND PARTIES

'1'0 A LEASE.

1. BASIC IWNCIYLES: A leasc is a contractual relationship through

\ \ .h id l tllc posscssio~l, ~ l lc riglit to use and t l~c right of' control ovcr an

;~ssct is tra~isfcrrcd fro111 its bona-fidc owncr to a user in

consideration for periodic re~ta l payments. The owncr of the

property is the lessor, the user of the property is the lessee and the

pcriodic rental is called tlic lease premium. Thus a lease e~~ables the

lcsscc to sdxl i t \~ tc pcriotlic Icmc prcmium for a lump sum that

would Il;\\;i' \ ~ I I rcqircd for wtrigllt purchascd of the assct.

operational definitions of the term. Some lease contract.; are for

indefinite periods, i n the sense that they contain automatic renewal

provisions. Such leascs rcprcscnt a combination of two separate

cont racts-the primary contract, which covers the first peri 3d of the

IC:ISL', il11~1 t l~c sc~011~1ary ~otltri\~L, which stipulates thc conditions for

7 . l'Al<'l'llCS ' 1 ' 0 A IACASE: 'l'lwc arc two partics to a conventional

Ic:\sc, tllc lcsscc mid tllc lessor. Complicated lcasc agrccncnts can,

liowcvcr, providc for a third party-the trustee.

T'hc trustec acts for a fec as the agent of the lessor, and in that

c q w i t y cnsurcs thc cnforcc~ncnt of thc provisions of the lease

c o ~ l ~ r x l . O~licr spccilji: assignments to bc carricd out by him depend

011 tllc ~ I ~ V ~ S ~ O I ~ S oi' 1 1 1 ~ ICI\SC COII~I'I\C~S. I n somc cascs, for instance

tllc t ~ ~ ~ s l c c is cnlr~~stcd with t l~c rcspo~~sibility for collecting thc lease

~ m ~ i ~ i w u s and l'or cnsuring thc propcr usc, repair and maintenance

of thc property. The trustee mediates in cases of interpretational

problc~ns i~~volving provisions of thc lcase contract. Okafor (1983)

250-25 I .

2.4 'I'Y PE OF ASSETS LEASED

In principle all real assets can bc lcasc. However, leasing is more

popular i n spccii;:iscd f'aciiitics or ccluipment, which arc eithcr too

cspc~~si\.c or 110t ; ~ \~ ;~ i l :~ l~ l c i \ I i \ l l liw ~iltriglit J > L I I - C ~ I ~ S C . Clioicc of ~ndustrial

sitcs. l i ~ ~I~SI ; I I ICL ' , 111ily I I O ~ be i ~ v i \ i l i ~ l ) l ~ Sol. SIIIC i l l many citics. 'I-hcy can,

I I~\YL'VC~, bc lcascd from thc appropriate statc or municipal authority. A

similar analogy applies to prospecting rights of mincrals and othcr natural

sCSoUrCCS. #

Sophisticated and heavy industrial or data processing equil)ment, on

the othcr hand, is of'ten lcascd on account of its prohibitive cost.

So~llc~i:llcs, 111~' pri~ll;~ry c~~~sidcl.il t i~ll i n leasing is to havc acccss to the

spccialiscd tuclmical scrviccs and maintcnancc which lcssor of cquipment

\\.ill prwictc. Lcasing I\ils gainctl tscmcndous popularity in a widc range of

facilities in dcvcloplng countries. 'I'hese include, but are by no means

liinitcil to:

il. Civil Ilngiiicering Equipment: Gcncral construction equipment;

road/buiIdi:~g/castl~-111ovi11g cquipment; and material-handling

cqitipn~c~~t.

1). O t'ticc l i i i t: co~iipi~tcrs; photocopying machi ncs and

cqi~ipl~~cnt for automatic filing systcms.

c . Real Estates: warehouses; petrol service stations; office buildings

and rctail stores.

d. 'I'r;\uspc~-( 15clr1ip11~c11(: Acl.opli~~~cs, r i ~ i l trucks and wagers, trailcrs

o l d occnll vcsscls.

Mining a~id ~ i ~ i t l ~ r i l l lcascs arc vcry popular in Nigeria. A mineral

ICXC gives t l i ~ iesscc thc right to work a specified mine. In the crude

pctrolcu~~l indwitry, lcssccs sccurc rights to 1m)spcct for and cxtlact crudc

pctrolcu~~l l'roni spccificd arcas. 'l'llc mining lcasc difTers slight11 fiom the

c > d i i l : l ~ . y ~ ~ x > l w t y loi~sc. tlnliI<c olllcr li)rms o f Icasc, thc minwil lcasc

a l l u \ \ ~ s tllc lcsscc lo own tllc ~nillcral cxtractcd. 'l'his fc'caturc is comhon to

il l1 loascs for tlic cxpl~iti\tioll of natural rcsources. Thus, in the lumber

industry, lcssccs arc allowcd ownership of all luinbcr felled within the

arcas covurcd by il Icasc. I n tlw samc way, gamc lcascs in thc natural parks

of 1 3 s t Africa confcr thc right of ownership of trophies collected. Non-

p.opcrty Icascs ofcn provide spccilic rcstrictions ovcr the amount and

\.;~luc 01' 111i1tcriills (~l~ltt~i ' i~l ~CSOLII.CCS) 10 be I ' C I I I O V C ~ by thc Icssc~ within a

pcriod. Siicll rcstrictions arc ink~ldcd to prcvcnt thc lcsscc from pursuing a

dclibcratc policy of "overkill". Okafor (1983) 25 1-252.

ariiount, if any, of advance lcasc payments to bc made.

forcscc continued usc of thc lcasc facility oftcn insist on mtomatic ,/ .?%.,

Y /.- -, - , . i tc~ic \ \~;~l 0pti011s. ,411 i l ~ ~ t ~ ~ l l i l t i ~ sc~icwal option providc: t h a t the I . . i

' . L

1 5 onditioos of tllc rcncwals will bc identical to those of the 8riginal w, Ic;~sc co~~ttxct. Clonciitio~li~l ~~c~icwnls option, on thc othcr hand,

... 111. Rights of o~vr~crship ovcr llic rcsidual value of a leased asset. In

principle, residual valucs belong to lcssor. However, there are cases

\ \ ~ I I c ~ c tlic ICSSCC Inily bc c~ititlcd to rcsidual valucs.

i \ l . l'rovisio~is ~*cgartling tllc right of' canccllation. Cancellation is

o I h l n t thc option of citllcr party. A canccllation option is

:~dv:l~~tagcowi tu tlic lbsscc wlicrc tlic Icascd oquiprncnt is subjcct to

riipid physical or tcch~lolugical obsolcsccnce or whcrc thc original

IC;ISC contract is for cl very long pcriod.

\I. Spccific provisions to govern the cxercise of thc purchase option

\vl~csc that option is providc for.

i I i s i ~ i I arhitra~io~l i n til l disputcs arising from the

i~iiplc~ilc~~t:ltiori or i~~tcrprclation of tlic tcrnis of thc contracl.

2.0 ('LASS1 1;ICATIONI 'I'Y IDES OF LEASES

Thc classificntion of lcascs is based on thc cxtent to which risks and

~.c\val-ds i~lcidct~l 10 C ~ V I ~ L ' I - S ~ I ~ ~ 01' a I C ~ I S C ~ asset lic with tllc Icssor or the

Icsscc. Risks i:~c!utlc tllc possibilities of losscs from idlc capacity or

I C ' L ' I I I ~ V ~ ~ ~ ~ C ~ ~ I I O [ ~ S O I ~ S C ~ I I C C ~ I I I C I o f v;~riiltio~ls i n rcturn duc to changing

cco~lcmic condi~io~ls. I<cwards may bc rcprcscntcd by the expectation of

pufitablc opcratio~l ovcr tlic asscts' cconoinic lifc and of gain from

appreciation i n vnlw or realization of a residual valuc. b

Sincc tllc transaction bctween a Icssor and a lcssee is based on a

lcasc agrcc~ncnt C ~ I I I I I ~ O H to both partics, it is appropriate to use consistent

clcli~~itio~ls. Nornlnlly, tllc two parlics will classify tllc 1::asc in thc same

\\.ay. NC\~L'I.IIICIC\SS, tllc appliciltion o f tl~csc definitions to the differing

circu~llsta~~ccs 01 ' t11c t\vo ~ ) i l ~ ' t ics may so~llcti~ncs rcsul t in thc !amc lease

bci~lg classilicd difl'crcntly by Icssor and lesscc.

\Vlictlier a lcasc is a financc lcasc or not depends on the substance of

thc iransaction snthcr than the form of the contract. A lcasc is cl issified as

a ti~laucc lcasc if it transfers substantially all risks atid rcwards rncident to

ow~crs l~ ip . Such cl ICI~SC is normally non-canccllablc and seculcs for the

Icssc~ I I I C I - ~ c ' o \ ~ c I . ~ oI'c;lpil;ll O I I I I ~ I Y plus ;I rcturn for thc funds i~wcstcd. A

IC:ISC is c I i ~ ~ ~ i I i ~ d ilS i l l \ O I ) C I ' ~ ~ I ~ I ~ ~ ICIISC; i i ' si~bstantially all risks and

rc\\.ards i~lcidcnt to ow~lcrsllip arc not tra~lslcrrcd (SAS 19).

l;lN:\N('15 1,15/\S15

A long-term, non-cancclli\blc Ic;~sc contracts arc known ;.s finance

01. ti~~;~llcial Icasc. Iisa~nplcs arc l>Ii\111, ~nuclli~icry, land, building, ships and

aircrafts. I n Nigeria, finance leascs are vcry popular with high-cost and

high tccl~~ology cquipmcnt. Fi~lancc lcases amortisc the cost of the asset

u\.cr tllc t c n ~ of lcasc. They arc, tllcrcforc, also called capital or full pay

out ic:lscs. Most firlancc Icascs arc dircct Icascs. Thc lcssor buy:, the asset

ictcntiiicd by tllc lesscc from thc rnr~nuhcti~rcr and signs a corltract fo lease

i t rmt to tlw Icsscc. 13nckcltwuc (1997) 445. Financc lcasc is further

divided into (typcs of finance lease):

I . Lcvcragcd lcasc

. . I I . Salc-and-lcasc-back

... 111. Cross-bordcr lcasc; and

i l l , 1hploit:ltivc we Iciw.

I . I,cvcr:tgctl I C ~ I S C : This involvcs Icssor, lcssee and financicr. Lessor

(lcasing canlpany) prbvidcs 25 percent of the asset's cost while the

remaining amount is provided by the financier (a bank or a financial

institution), mainly as loan. Leveraged lease is a popular method of

tilmcing cspcnsivc asscis.

. . I . Salc-:~nd-lease-back lease: Sonlctimes a user may scll an (existing)

;ISSL'I O \ V I \ C ~ by llinl 10 ~ I I C ICSSOI' ( lc i \~i~lg company) and Iwsc it back

I i . I I ~III<I-Ic~ISC-I)~ICI< ~ ~ I T : I ~ ~ ~ C I I I C I I ~ S IT;:\)/ p~ovidc

sul)stantial tax bc~lcfits ; ~ r l t l liquidity to thc Icsscc.

. . . I 1 1 . Cross-13or(Ecr_Lcasc In casc of cross border or international lease,

tllc Icssor and the lesscc arc situatcd in two different countries.

I3oc;1\1sc tllc Icasc transactioli trlkcs placc bctwecn partics of two or

~llurc countrics, i t is callcd cross-bordcr Icasc. It involves

rc \ l :~ t io~lsliilxi : I I N I t a x i11il)l icatio~is, and is morc complc;! than the

do~ncstic icnsc. Wllcn tllc Icasc transxtion takcs placc be twen three

partics I I I ~ I I I L I ~ C ~ L I S C T 1 vcndor, Icssor and lessee in threc different

countries, i t is called foreign-to-foreign lease.

iv. Esploitativc lcasci In this type of Icasc, the lcssec is allowed to

csploit solnc ~latural or niincral rcsourccs in rcturn for royalties that

arc paid to tllc Icssor. lixploitntivc Icasc arc of'tcll cxccutcd bctwccn

cou~ltsics (Icssor) and lirn~s, wl~ic l~ arc tlic Icsscc. f:or inst,~ncc, most

01' the Ol'l'C cou~~tsics cxccutc this typc of lcnsc wl~crcby the

countrics allow sol& international major oil companies to exploit

their oil rcscrves in return for some royalties.

111 ti nancu Icase, thc iiiai n tciiance and insurancc are no l-mall y the

~ u p o ~ ~ s i b i l i t y ol'tllc icsscu. 'I'llc lcsscc also bears t l ~ c risks of ob: olcsccncc.

i\ till;mcc IC;ISC ; I I T ; I I I ~ C I I ~ C ~ ~ ~ 11l;iy providl: for rcllcwal of' c o~ltract or

~~urc-l~;~sc' 01' tlic i~ssct Ily tlic lcsscc al'tcr Ihc colitract cxpircs. 'l'hl: option of

~ ~ \ ~ ~ . c ' l l ; ~ s i ~ i g tlw !c:~sctl i~ssct !?y tllc lcsscc is not incorporated i l l thc lease

~011trilct i n Nigcria bccausc i l'sucli nl i option is provided thc lcasc is lcgally

co~istrl~cd to bc a Iiirc-purcliase agrcement. Pandey (2000) 1039- lO4O.

O l ' l ~ l ~ A ' l ' l N ~ ~ 1 ,FXSK.

Sl~~tI-tcl . l~i. cnllccllablc Icasc i~t.r;~ngcnlcnts arc callcd operating

I c w ~ . Couvcllicl~cc and instilnt scrviccs arc thc lialln~ark of operating

Icascs. 13amplcs arc -a tourist renting a car, lcase contracts for computers,

ot'ticc cclrlilmicl~ls, trucks iuid l~otcl rooms. For asscts such as con~puters or

officc cquipmcrit, an operating lcasc may run for thrce to five yeah. The

lcssor is gcncrally responsible for maintenance and insurai~cc. The

compaliy may also providc other services. A single operating Icasl: contract

Illilv lwt lillly i~lwrtisc tllc original cost of thc asset; it covcrs n period

co~~sidcrably sl~ortcr t l ia~i tlic ~lscfill life of the asset. Bccausc of the short

duration a t ~ c l tlic Icsscc's option to ci~nccl thc Icasc, thc risk of

obsolcsccncc remains with tllc lcssor. Naturally, the short the lease period

and/or Iligl~cr risks of obsolesccnce, thc higher will be the lease rentals.

Pnndcy (2000) 1038- 1039. *

Tlic following chart rcprescnts examples of situations in which a

IC~ISC would ~l;:rllli~lly bc classified as a finance lcasc or operating lease.

'I'llc c.s;~~i~plc.s do not ~~cccssnrily rcflcct a11 possiblc situations i n which a

Icasc III ; \Y bc ~li\ssili~'ci i\S i\ I ~ I I ~ \ I I C C ICI\SC, 1101' S I I O L I I ~ I C ~ ~ S C nccc:ssarily be

classiticd as a filiance lcasc by virtue of the route followed on this chart.

'I'llc substance of the transaction determines the classification.

Y- Yes tratls fcrrcd by the end of lcasc tcrm I

L + No

lcasc paytncnts grc;~tcr Illan or substantially cqu:ll to nssrls lirir \~;rluc.

Source: 'I'llc chart is adoptcd from International Accounting jtandards

2.7 CMII I%OW CONSEQUISNCKS 0 1 t A FINANCIS LJSASL

'l'llc cash flow impIications of a lease are cithcr measured in terms of

the relative effective cost of leasing compared without outright purchase,

or i n terms of the efSectiSe rate of interest reprcsented by the lease

prc~iiiunl. llowcvcr, bcforc such evaluation bccomcs necessary the

co~iin;cscinl pro tilability of tlic facility has to bc established. The

ul\tIc~.lyi~\!! ~ ~ I ~ W C S S l i ~ C V : I I \ I ~ \ ~ ~ I I ~ : ;I Iwsc I>I .OI J ( )S~ I I is I)asic;llly ::imilar to

t1r:lt 01' ally otlrcr. capital cxpcnditurc proposal. l'otcntial financial bcncfits

( ~ i l ~ . ~ i i ~ l g ~ , cost, savings ctc) from tllc facility to bc leased arc compared

with the total cffcctivc cost of the Icasc. Okafor (1983) 256.

29

A fit~iltlcc Icasc 112s cash flow conscqucnccs. It is a wsy of normal

fiilat~cii~g for a ~o tnpmy. Suppose il company has found it financially

\ \~oi .~ lwl~i lc lo acquire nn c q ~ ~ i l m ~ l l t wsti nj: (N80,000) Eighty 'l'housand

N:I~~-;I cmly. 'l 'llc' c'quipmcnl is cs~iil~alcd lo last fix- cight (8) ycnls. Instcad

of buying. t l~c colnpnny call Icasc tllc cqiripmcnt for cight ycars at an

nr~r~ual lcase rental of ($416,000) Sixtecn Thousand Naira onl), from its

n~nnuf'acturer. The company will have to provide for the maintenance,

illsw-nncc and o t l w operating expenscs associated with the use of tde asset

in hot11 nltcrnativcs Icasing and buying. Assuming a written-down

cicp-ccia~iorl of 2.5 i~cr.ccrlt per- illltllttll, a borrowing ratc of' 14 pcr1:cnt and a

I I I I ~ I I I;IS r-iltc 01' 35 I ) C I . C C I I ~ li)r t l ~ cc ~lpany. 'l'hc cash flow

couscq~rc~~ccs or. implication of thc Icasc arc S I I O \ V ~ ~ in tablc 2.1

'I'ablc 2.1 Cash flow consequences of a lease

Rental '

-- After tax

leasc Rcntal

- 1 t4400

.--..--.-. --.-,-.- - 10,400

- 10,400

- 1 0,400

7(2+4+6)

flow

80,000

- 1 7,400 ---.-. . -.

- 15,650

-14,338

- 13,353

Thcrc would bc:

Avoida~lce of the purchase price: The Company can acquire the asset

without imincdiatcly paying for it. Cash outflow saved is equivdwt to a

cash inflow; therc is a cash inflow of ($480,000) Eighty Thous; nd Naira

only.

1 ,oss of l)cprcci:\lion 'l':\x Sliicltl: Dcprcciation is a dcductiblc expense

:mJ smrcs tns.

l)cprccinlio~i tax sliiold is cclual lo thc amount of dcjmxiation

~uultiplicd by thl . t r rate for cat-' " fll(: cight vcars. The company will

loose a series 01 ,:iation ta> when : IS the lease as shown

i n tablc 2 , l .

After- tax payillent of lease re~itx'

(N10.000), Sistcc~l 'Tilousand Naira only p c ~ yLt., ,

tlicsc ~ x ~ ~ i i ~ c n ~ s will yield tax sliicld of N5600 or (N16,000 x 0.35) per

~~c:~r.s. l'lius, tlic nficr-lax Icnsc payments, i.c. cash outflow, would bc

($4 16,000-P15,OOO) = 941 0,400 pcr year.

lascs. 111 case il docs 1\01, l h c ~ tlcjwccjalio~l is worth nothing to it. Also tax

shiclcls woultl vary with lhc nlarginal tax rate for thc company. 'Thc

COIISC~IICIICC'S 01' tllc C;ISII flow Icati us to ask clucstions as, can a lcase

prcscnt vclluc of tllc Icasc cash flows to the lcssor arc tllc same as for lessee

for tllc c lmgc i n signs; what lllc lcsscc losscs, thc lcssor gains and vice-

I low car1 both lcsscc arid h c lcssor bcncfil from a Icascfl Both gain

govcrntwxlt's csl~cnsc ~ C C ~ I U S C or tllc diffcrcncc in thcir tax rat1:s.

dcprcciatio~~ and iulctcst ta i sl~iclcls. 'l'hc implicit principal paylncnts in a

lcasc rcntal arc shicldcd by dcprcciation, while interest deductions provide

for inlplicit rctur~l on the Icsscc's capilal. With a positivc intcrcst rate and

accclcrntcd clcprcciation, tllc govcr~l~ncnt's rcccipts of tax on leasc rentals

will 1\1lI sllorl, ill p l w x l valuc tcnns, of dcprcciation and inlcrcst tax

' 1 ' 1 ~ g;\i~l to 1 1 1 ~ ' IL'SSOI. ( ~ I W ; I Y S Ilighcr) ICSS tllc gain to tllc lcssce

(Icsscr) is always exactly cclual to ~Ilc nct loss to thc govcrnmenl. Pandey

( 2 0 0 0 ) 1030:s 104s: 1050,

2.5 hIYrI'HS ABOUT LEASING

'I'llc t r u t h about sonle myths on lcasi ng includes:

1 . I.,crisir~g I'rovidcs 100 I'c~-ccat Fiaancing: Onc misconception

: \ b o ~ ~ t leasing is that i t providcs 100 pcrccnt financing for the asset as

tllc ICSSCC cat1 : \ v o ~ c I I ) ~ ~ I I I C I I ~ Sor acquiring thc asset. 71nc Icsscc, it is

assunlcd, can prcscrvc his liquid rcsourccs for othcr purposcs. When

n firm borrows to buy an assct, cash increascs with borrowing and

dccrcases by the sarnc amount with the purchase of the asset. It has

tllc nssct to i~sc but a liability of rcpaying thc loan and interest. In

lcnsing also, thc fir111 acquires the asset and incurs the liability to

nlakc fiscci pay~ncnts i n fi~turc. I n prncticc, thcreforc, 1e;ising like

bcwo\vi~lg, co~ll~llits tlic company I'or a strcaln ol'paymcnts in futurc.

ii. lxasiilg 1'1-ovitlcs Off-tllc-Ualn~lce-Shcet Financing: As the lessee

i n Nigcria is not obligcd to disclosc her lcase liability on the balance

shcct, i t is bclicvcci that lcasing docs not affcct the debt-equity ratio

while borrowing incrcascs hcr dcbt-cquity ratio. The myth goes,

tllcrcforc, that Icnsing providcs off-balancc shcct financi~lg leaving

!Ilc ! I I . I~ 'S cicbt rilisi~lg ability intact. r l ' l i i ~ is a fallacious argurncnt.

1;irstly. a dcbt --equity ~iortn p ~ l s a limit on thc firms' total

Iwro\vi l i p . Its c I c I ) ~ ~ i l l ) : l ~ i ty C I C P C I ~ ~ S on its dcbt servicing ability

I . ; I I~ ICI . 111;111 I I I C I);II;IIICC SIICCI r:llios. C o ~ ~ t r i i ~ t i ~ a l obligatjon of any

l i ~ r ~ l i tll~.ol.~gh :I Icasc or lo;~ti, rcducc dcbt servicing ability xnd add to

tinancia1 risk, l,ctidcrs rccognizc thc Icsscc's cash flow burden

arising from lcase payn~cnts.

As a Icasc uses t l~c firm's dcbt capacity, it displaces dcbt.

Lcasing can certainly hclp companics to have enough deb1 servtcing

ability l ~ u t catinot ~ O ~ I - O W from banks or financial insti'utions on

: K * C O \ I I I ~ of' i ~ l s ~ i ~ l ~ ~ i o ~ ~ i ~ l 1io1111s 011 dcI)t-cqi~ity o r r c j ; ~ ~ l a t i ~ ~ ~ ~ s . IJndcr

110 ci~.c\~~llsta~iccs G\II a Icasc cllllancc thc firm's dcbt capac ity.

iii. Leasing lnrproves Performance: Another myth is that tl1c rcturn on

investment (profits divided by investment) will increa:e since a

lcasc docs not appcar as ail invcstnlcnt on thc books or the balance

slicct. I ~ C S ~ C ~ C S back-c~idcd ~ C ~ ~ S C S cnable showing highcr profits in

~l ic initial ycars of 1116 Icasc. Such ~,crformancc ratios arc illusory. A

lir~n's valuc is nf'l'cctcd by tlic valuc of its asscts and liabilities rather

I l l i \ t l book prolits crcatcd tllrough accounting adjustments. A lease

will crcntc value to the firm only if thc benefits from it are more than

its costs.

i . Lcasiag Avoids Coutroi of Capital Spending: Another

~ i i i s c o ~ ~ c c l ~ t i ~ n is t l ~ t Icil~i~lg CIOCS not I I C C ~ capital expenditure

sctwl~ilig as no ilivcstlllc~~ts arc involvcd. Sincc a long-tcrm lease

i~l\*ol\rcs Iollg-1~1.111 Ii~\; ln~i;\I (.ommi tmcnts, i t oilght to b(. scrccncd

accortiii\giy in any good capital cxpcnditurc planning a11d control

systcm. If Icasing is not scsccncd and is uscd to circumvent capital

expcnditurc screening and approval, it may add to the firm's risk,

make it vulncrable to business fluctuations, and endanger its

survival. I'andcy (2090) 140- 142.

2.9 I<Kr\SONS 1W1< 1,ICASING

.l'licsc arc a t Icast Sour rcasons why lcasing has grown in popularity.

1 . A colnpany may not actually have the funds available to purchase

thc asset. It may not have any other alternative sources of funds. The

purchase of largc picces of equipment such as aircraft and large oil

tnnkors call bc vcry cxpcnsivc. l'hc purcllasc of a large mainframe

conlputcr can bc beyond the means of small companies. ],easing is,

~IIC\I.L\I~)SC. :I SOIII'CC O I ' I ~ I I ~ I I I C C , il WI\Y o f 1 ~ ~ 1 1 ilblc t~ obt;~ilt t h ~ usc of

an nssct ~ p o n paymcnt of tlic first rcntal. Evcn if a co~npany has

funds available, i t may prefcr to use these funds for some other

purpose, eithcr where they can be more profitably used or where the

acquisition of the other asset cannot be linked to a particular form of

Iit~i\t~cc such as Icasing.

Thcrc can bc considerable tax advantages in leasing. If a company

has not becn showing taxablc profits in the years prior to its decision

to accluirc an assct, it will not bc able to obtain thc immcdiatc

ndvantagcs of any invcstmcnt allowances. Up till 1984, a company

\\'ils i~llowcd t iw dcprcciation on many invcstmcnts, M hich meant

tha t i t could writc of 100 pcrccnt of the cost of the assct against it's

taxablc profits at any time i t close. If the company has to pay tax in

the year it wished to acquire the asset, the allowances cuulb offer an

immediate cash benefit. If the company was not paylng taxes it

could iiot obtain and immediate bencfit. These companies could only

&tail\ tllc cady arlvo~~tagc 01' thc i~ivcstrncnt allowan~cs through

Icnsing. 'Thc lcssor company had profits, it purchased thc asset,

obtaincd tllc tax allowt~~lccs, and passcd thc advantages of the lower

nct cost onto the lessee in lower rental payments.

A company :nay not wish to own a certain type of asset for example

a computcr. These machines can quickly become out of date, and the

company may wish always to have available the most up-to-date

cquipnlc~~t. 'I'IIcI'c arc always somc cornpanics who are willing to use

sccotdllnnd computers. 'I'herefore, it i s convenient to. lease a new

cot~~pi~tct. Ibr, say, l i ~ i ~ r ycors a~ld thcn to rcplacc i l by leasing

cmothcr ncw tnachine. Thc lessor takes the machine bat k at the end

o t' the few yews n r d lcascs or scl Is it to anothcr customer. This takes

tllc risks atid tr-oddc out of tlic Iiands of the Icssce.

4. 11 is ~ \ L * I I si~ggcstcd t l ~ i ~ t Ici~si~ij.. docs 11c)t i~~tcrfbrc l ~ i t h othcr

possiblc bo~.rowing or crcdit Sacilitatcs. 'I'raditionally, Icasing was

sccn as "off the br~ln~ice slieet" financing. A company did not need

to record the asset with its other fixed assets in its ann~lal balance

slicct. Thc conipany has usc of thc cquipmcnt, just as milch as if it

# owticd tlic cquiynicnt itself- tllc equipmcnt is uscd to car11 the profit

that appcnr in tlic accounts, but bccause the company docs not that

I I ; \ \ ~ a Icg;~l titlc, the crltril)lllcnt was traditionally not tcl shown as

olic of thc asscts of the conipany. This can affect the prof~t -to-asset

ratio of a company. A company that leases its equipmen can show

in its accounts a higher rcturn on its assets than a company that

purchases thc cquipmcnt. If the earnings from using the asset exceed

tlic ~,ctiti~l, a prolit will bc shown and thc asscts in thc balancc sheet

will not rcllcct the ilsc of the lcased asset. Samucls & Co (1997)

2.10 ADVANTAGES OF LEASING

The popularity of leasing has continued to increase because of some

solid bcncfit, which Icsscc, lessor (leasing companies) and manufacturers

of Icnsc-ablc I'acilitics clcrivc li-om thc asrangcment. Lcasing may be the

most cffcctivc, if not, tllc only way for securing a market for vciy

sophisticated cquipmcnt. I-Icncc manufcwturcrs of' s~lch cquipmcnt, oftcn

usc lcasing as a marketing strategy. We shall, howevcr, concentrate our

cliscussion on thc advantagcs and problcnis of Icasing 'from the point of

view of lcssccs.

111 that uonncction, thc advantagcs that hiivc gaincd thc wicicst

recognition include thc following:

a. Flexibility- Leasing provides flexibility for the lessee in two ways.

First, thc Icsscc chooscs from among a widc range of cquipmcnt find

from among a widc packagc of tcrnis offered by alternative lessor.

Secondly, the Icsscc can conmiicntly adjust its opcrating capacil.y, 9

sincc lcascd capacity can caslly be built up or reduced in line with

opcrating nccds. Coi~scq~lcntly, facilities whicl~ are neetfcd

seasonally or which arc not likcly to be fully used, if bought arc best

suited for leasing.

b. Finaaciag: Lcasing is a very good financing device. For firms with

problems of capital rationing it is a very convenient way to syrcad

thc stream of heavy capital commitment, firms without obvious

capital rationing problcms can still use leasing as a device to

consci-vc frmds for futnrc capital nceds.

c. Safeguard against obsolescence: Tlic risk of rapid obsolescc~~cc

can bc cffcctivcly safcguardcd against tlirougli Icasing. A

n~anufacturcr is bound to sustain hcavy losses wl~enevcr Ilc is forced

to scrap lilci l i tics ci thcr bcc;li~sc they have b c c ~ rcndcrcd cxpcnsivc

or incfticicnt by ncw modcls, or bccausc ncw products llavc b c c ~

pcrfcctcd. 'The risk cquipmcnt obsolesccncc is pai~icularly high in

thc data processing and clcctronic industries. This may account for

thc popularity of' short-term canccllablc lcasc contracts i n thc

cquipnlcnt market for tllesc industries.

d. Circurnvc~~tiol~ of Legal lieslriciions: A Icxe can afford a lesscc:

thc only opportunity to sccurc thc scrviccs of' an assct, which IN? is

otherwise not allowed to acquirc. Legal restrictions on thc 4

ownership of specified assets arisc indifferent ways. Thc operations

a firm may bc encumbered by a blanket after-acquired propcrty

clausc. This is a provision in some mortgage bond indentures which

extends thc rights of lien of the bond-holdcrs not only to propcrty

specifically mcntionccl in thc contact but also to those to be acquirccl

in futurc by t l x Gml. In that situation, the firm could use leasing to

acquirc thc cquipincnt it nccds without jeopardising the security of

the equipment i n the cvcnt of forccd liquidation.

c. Tax Savings: Lcasing yiclds tax savings for the lessee, bccausc

lcase prcmiums arc usually tax-allowable cxpenses. The tax shicld

provided by leasing must, bc co~ripared with the potential loss of

alternative tax savings to bc dcrivcd from capital allowances and/or

invcst~ncnt crcdit if thc cquipn~cnt is purchased.

In countrics such as thc United States, whcrc depreciation is tax-

allowi~blc, thc ti^^ savings potential of lcasing has bcen shown to bc

lcss attractivc than that of con~parablc dcprcciation chargcs. This is

particularly tllc casc whcrc con~panics arc frcc to usc accclcratcd

dcprcciation mcthods for both incoinc reporting and tax purposcs.

It is, thcrcforc, mislcading to assume that leasing always offers

bettcr tax savings. Each casc has to be evaluated on the basisbof

prevailing tax laws and accounting proccdurcs.

1: Lcvcragc Effcct: A judicious usc of leasing cnablcs a finn to

masimisc its gains fi-om financial Icvcrage. For instance, a firm that

has rcachcd its maximum borrowing powcrs can obtain crccfit

inclircctly through Icasing. And o w e thc avcsagc rcturn on asscts is

morc than the effective ratc o l lcase preiniun~s, lcasing has thc saiw

b positive effect on return and on equity as an outright loan. Bccausc

of this fcature, some people dcscribe leasing, rather sarcastically, as

off-thc-rccord borrowing.

g. Acccss to Scrviccs: Most lcasc contracts rcquire the lessor to

providc rcpair and maintcnnncc sci-viccs for thc cquipmcnt. Such

provisions savc thc lcsscc tllc effort and time necessary to ncgotiatc

privatc sourccs for tl~csc scr'vices. Moreovcr, the Icssor will have

spccialised knowledge of the equipment and therefore will be in a

position to providc bcttcr services. Consequently, leasing providcs

automatic acccss to spccialiscd scrviccs for the cquipment. Okafor

( 1983) 2.52-254.

2.1 1 PIiOULEMS AND I'ROSI'IICTS OF LEASING

In spitc of its advantages, lcasing is not as widespread as would bc

cxpected, because of some inllcrcnt pit falls. The most obvious

disadvantagc is the liigli cost. Tlic cumulative cost of lcasing a piecdof

cquipmcnt to be uscd to its tcnninal life must nccessarily be higher than its

pirchnsc cost. :

Thc conclusion is borne out by ordinary common scnsc. Lcasc

1)rcmiums nus st ncccssi~~.ily covcr thc Icssor's basic: cost of thc equipmwt,

accruablc intercst on the implicit crcdit cxtendcd and son~c margin to

cnablc him (the lcssor) to stay in business. The relative cost is even 11igl)cr

where the lcssor is an intermcdia~y, rather than the equipment

manufacturcr hilnself. The rcquircn~cnts for advance paynlcnts (somctimcs

involving thc cquipmcnt of nlany niontlis premium) are coinmoll in most

Icusc contracts, and thus incrcasc thcir cffcctivc costs.

Anothcr scrious disadvantagc is tlie illirsion of self-sufficiency

which Icasing can crcatc for the Icssec. Thus, the prescnce of leascd

facilities, thus, the prcscnce of lcascd facilities can dampen the enthusiasm

of n ncw firm to build up a solid assct base (and hence a good cquity basc)

ti>r li1ti11.c gro\vth a~ld cxp;111sio11. 111 t h i ~ t rcgard, instalmcntal payment

plans for new ccluipn~cnt or its outright purchasc with borrowcd funds

could bc a prcfcrrcd altcrnativc.

Thc third disadvantage of leasing is the loss of the salvage value of

lcascd equipment. This loss is particularly painful in long-term Icascs. In

S L I C ~ situation, the Icssor is able to rccovcr the total depreciable valuc of

thc assct bcforc the expiration of the lease. Therefore, the denial of the

scsidual valuc to the !csscc is not only unjustifiable but also rcprcssivc.,

i)usincss. S ~ ) i l i ~ ~ ~ i ~ i l l l ~ l ~ , will illustmtc thc poiiii. A pctrol dcalcr, \ v ) ~ o ,

Icases a service station, could be forced out of the station (through

canccllation or non-rcncwal of Icasc) whcn he lm succccdcd in building

up a patronage network. The sanlc situation could face a fish-processi~g

factory, which operatcs with Icascd cold storage depots.

Evcn if thc risk of 11011-rcnewal or canccllation is rcn~ovcd, thc

lcsscc can bc cxposcd to rcgrcssive conditions in the renewal contract. For

instance, rencwal may be at increased premiums, nlay rcsult in a

curtai lmcnt of thc ptckagc of scrviccs previously offcred or may contain

othcr forms of disability. All thcsc possibilities incrcasc thc total risk

cxposurc of thc lesscc.

Lcasing has trcinendous prospects in developing countries. Thcre

arc two rcasons for this thus:

. . - 1 Iw scarcity of capital; and

- Thc paucity of tcchiiical cxpcrtisc in thcsc cbuntrics.

The growth of specialised leasing firms in developing countrics

cnablcs budding industrialists to obtain requisitc facilities in a payncnt

schedule that tlicy can cope with. Such firms would, moreover, bc ablc to

attract and rctain enough expertise to render timely and effective repair and

maintcnpncc scl-viccs to tlicir cliciits. Okafor (1983) 254-255. b

2.12 LEASING IN Tl-IE FINANCIAL STATEMENT OF LESSES.

1 . FINANCE LEASE.

A finance lease should bc recognised as an asset and a liability in the

balance sheet of a lessee at amounts equal at the inception of the lease to

the fair value of the lcased property, net of grants and tax credits receivable

by tlic Icssor or if lowcr, at tlic prescnt value of the minimum lcase

paynlents. In calculating thc present value of thc iilininlum lease paymcnts

tlic discount factor is thc intercst rate implicit in the lease, if this is

practicablc to dctcrn~inc; if not, thc lesscc's in incremental borrowing rate

is uscd.

Transactions and other events ought to be accounted for an

prescntcd in accordancc with their substance and Gnaiicial reality and not

merely with legal fill-n. While the lcgal form of a lease agreement is that

~Iic Icssec ~iiay acquire 110 lcgal title to thc lcascd assct, in tllc case of

.Linancc Icascs the substnncc a i d financial rcality are that the lesscc

a~quircs tllc cco~lomic bc~icLits of tlic LISC of tlic lcascd iissct for thc major

part of its uscf~il lifc in rcturn for entcring into an obligation to pay for that

right an i~mount npproximatcly to thc fair value of thc assct and the rclatcd

financc chargc.

If such lease transactions are not reflected in the lessee's balance

sheet, the cconoinic resources and the level of obligations of an enterfiise

arc understand, thcrcby distorting financial ratios. It is, thcrcforc,

r~pproprintc thilt a financc lcasc bc rccogniscd in thc Icsscc's balailcc slicct

both as an asset and as an obligatioil to pay futurc rcntals. At thc inception

of tllc lcasc, the assct and tllc liability for the futurc rentals are recogniscd

in thc balancc shcct at thc sarnc amounts. Rentals should bc apportioned

between the finance cl~arge and the reduction of the outstanding liability.

Thc finance charge should be allocated to periods during the lease tern1 so

as to produce a constant pcsiodic rate of interest on the remaining balance

of thc liability lbr cach pcriod. Some form of appsoximations may be uscd.

Thc clifli.rcncc bctwccn tlic total minimum Icasc paymcnts ovcr Lllc

Icasc tcnn and thc initially rccognizcd liabilily rcprcscnts tllc fitli\ilcc

chargc. 'This charge is allocatcci tc: pcriods duriilg tlic lcasc tcrm so ils to

produce a constant periodic rate of interest on the remaining balance ol'the

liability during cac,h pcriod. In practicc, apyroximc~tions arc somctimcs

uscd to simplil'y t l~c calculation.

A finnncc Icasc givcs risc to a dcprcciation cxpcnsc for thc assct as

wcll as financc cxpensc for cach accounting pcriod. l%c dcprcciation

policy for Icascd assets should be consistent with that for depreciablc

asscts which arc owncd, and the dcprcciation rccognised should bc

calculated on the basis sct out in "lliter~~ational Accounting Slaadards

(IAS) 4, or statcnlcnts of Accouliting standards (SAS) 9-Depreciation

Accounting and I~ilcrnalional riccor~nting Standards (IAS) 16-

property, plant arid 1Cquip1aent. If thcrc is 110 rcasonablc ccrtainly that

thc lcsscc will obtain ownership by thc cnd of the lease tcrm, thc asscl

should bc fully dcprcciatcd over the shorter of the lease tern1 or its uscful

lifc.

Thc dcyrcciablc amount of a leased asset is allocated to each

awounting pcriod during the pcriod of expected usc on a systc~natic basis

consistent with the dcyrcciatioll policy the lessee adopts for depreciablc

assets that are owned. If there is reasonable certainly that the lessee will

obtain owncr-ship by thc cnd of the lcasc tcrnl, the pcriod of expected use is

the useful lifc of thc asscts, otherwise the asset is deyreciatcd ovcr thc

slmtcr of thc lcasc tcrm or its uscful life. The s i m of tllc dcprcciation

cxpc~lscs for thc assut and thc finance cxpcnsc for thc period is not

normally thc semc as rentals payable for the period, and i t is, thercforc,

inappropriate simply to chargc thc rcntal payable to income. Accordingly,

thc assct and tlw related liability arc irnlikcly to be cclual in amount aftcr

thc inception of tllc Icasc.

. . 11. OPERATING LEASE

Tlic charge to income under an operating lease should be the rental

cspcnsc for thc accounting period rccognizcd on a systcnlatic basis that is

rcprcsentativc of thc tinlc pattern of the users benefits. For operating

Icascs, rcntal cxpenscs (excluding costs for serviccs such as insurance a d

maintcnancc) is rccogniscd on a systematic basis that is rcprcscntativE of

thc timc pattcm of the user's bencfit evcn if the payments are not on that

basis.

iii. DISCLOSUM:

Disclosure should be made of the amount of asscts that are the subject of

financc Icascs at cach balancc shcct datc. Liabilities relatcd to these lcascd

asscts should bc shown separately from other liabilities, differentiatillg

betwecn the cui-sent and long-term portions. It is appropriate that thc

amount of assets used by the lcssec that arc the subjcct of finance leases bc

separately identified in the financial statements. It is often useful to havc

this disclosure prcscntcd by cach major class of asset. The aggregate

amount of the related liabilitics is shown either as the total of the nliniinum

lcasc payncnts, with futurc financc chargcs being scparatcly dcductcd, or

as thc nct prescnt valuc of thc liabilitics, disclosing in summary fonn the

interest rates used as the discounting factors. It is not appropriate for the

liabilities for lcascd asscts to bc prcscntcd in the financial statcments as a

deduction from thc lcascd asscts.

The rcntal cxpcnsc undcr opcrating lcascs is sometimcs discloscd for

cach period for which an income statement is presented. This is intended to

indicatc the nmsurc of an cntcrpriscs dcpcndcncc on rcntcd rathcr than

owncd assets. Commitments for minimum lease payments undcr financc

. leases and undcr non-cancellable operating leases with a term of more than

onc year should be disclosed in summary form giving the amount ,and

pcriods in which thc paynlcnts will bccome due.

Intel-n:itional Accomiting Standards (IAS) 5 o r statcnlerlt of

Accounting Standard (SAS) 2- Iriforriiatio~l to be disclosed in financial

statenlcnts-rcquircs disclosure of rcpaynlcnt tcrms and intercst rates for

loans falling duc in more than one year. For finance lease, it may be morc

convenient to disclose in summary form the amounts of future payments

and thc periods in which they will become due, for example, each of the

next five years and cach succeeding five years period. Similarly, in order

to show an cnterprise's cornn~itments, it is appropriate to disclosc in

summaly form thc futurc rcntal paynlents undcr non-ca~~ccllablc opcrating

lcascs of morc than onc ycar and thc pcriods in which they will bc bccomc

duc (for cxamplc, cach of thc ncxt fivc years and cach succeeding five ycar

period.)

Disclosure should be made of significant financing restrictions,

rcncwnl or purchnsc options contingcnt rcntals and othcr contingcncics

arising from Icilscs. Ccrtain othcr disclosure relevant to both financc and

operating lcascs may also bc appropriate. Examplcs of t h ~ s c arc:

Thc nature of any rcnewal options, purchasc options or escalation

clauscs;

Financial restrictions imposed by the lease agreement such as

limitations additional borrowing or further Icasing.

Thc naturc of any contingcnt rentals such as those based on usage or

salcs; and

Thc naturc of any contingcnt liability in rcspcct of costs expected at

thc cnd of tllc lcasc term. (IAS 17).

2.13 LEASES IN THE FINANCIAL STATEMENTS OF LESSORS

1. FINANCE LEASES

An asset held under a finance lease should be recognised in the

balance sheet not as property plant and equipment but as a receivable at an

amount cqual to the net investment in the lease. Under finance Icase,

substa~itially all thc risks and rewards incident to ownership are transferred

by the lcssor and thus thc lcase rcntals rcceivablc arc treated by thc lcssor

as repayments of principal and finance income to reimburse and reward the

lessor for ii~vcstmcnts and services.

48

Subject to the consideration of prudence, the recognition of finance

inconlc should bc bascd on a pattcrn rcflccting a constant periodic rate of

rcturti on citl~cr thc Icssos 11ct invcstn~cnt outstanding or thc nct cash

invcstmcnt outstanding in respcct of the finance lease. 'The method used

should bc applicd coiisisteiitly to lease of a similar financial character. A

lcssor ai~ils to allocatc financc inconic ovcr tlic lcasc tcrnl on systematic

and rational basis. This income allocation is usually based on a pattern

.reflecting a constant periodic return on the lessor net investmcnt

outstanding i n rcspcct of thc financc lease. Lease rentals relating,the

accounting pcriod, excluding costs for services, are applied against the

gross investmcnt i n tllc Icasc to rcd~tcc both tl~c principal and the uncarticd

iinancc incomc.

In s p a d i n g incomc on a systematic basis, the lcssor recognizes

uncertainties relating, for example, to the collectibles of lease rentals or to

future levels of interest rates. The longer the term of the lease the greater

the risks involved and the consideration of prudence may require

modification of the pattern of income recognition to reflect the

circumstances. Estimated unguaranteed residual values used in computing

the lcssor gross invcstn~cnt in a lcasc arc rcccivcd rcgularly. If thcre has

bccn a pcrnlancnt rcduction in thc cstinlatcd unguarantced rcsidual valuc,

the income allocation ovcr thc lcase term is revised and any rcduction in

respect of amounts already accrued is recognized irnrnediately.

Since very different results flow from the use of net investment and

thc usc of thc nct cash invcstmcnt for allocation of inconw, thc mcthod

uscd nccds to bc applicd consistently to lcasc of thc samc financc character

and discloscd. \

ii. OPERATING LEASE.

Asscts hcld for opcrating lcase should bc recognised as property,

plant and equipment in thc balance sheet of lessor. Under an operating

leasc, thc risks and rewards incident to ownership of an asset remain with

thc lessor. Therefore, the asset is treated by thc lessor as a deprehable

assct. A manufacturer or dcalcr lcssor docs not recognize any sclling profit

on cntcring into an opcrating lcasc bccausc i t is not thc equipment of a

salc. Rcntal income should bc recognized on straight-line basis ovcr thc

lease term, uidess another systematic basis is more representative of the

time pattern of the earnings process contained in the lease. Costs, including

dcprcciation, incurred in earning the rental income arc recognized as

cxpcnscs. Rcnal income (cxcluding rcceipts for services provided such as

insurance and maintenance) is recognized on straight-Iine basis over thc

lcasc tern1 cvcn if thc receipts are not on such a basis, unless another

systematic basis is marc rcprcscntativc of the time pattern of the earnings

process contained i n thc leasc. Initial indirect costs incurrcd specifically to

cam rcvcilues from an operating lease are either deferred and allocated to

income over the leasc term in proportion to the recognition of rcntal

income, or arc recognised as an expense in tlie period in which they are

i~icurred.

?. I hc dcprcciiltion of Icnscd asscts, shoi~ld bc 011 a basis consistent

with thc lessor noi-mal dcpreciation policy for simil'ar assets, and tlic

dcprcciation chargc should bc calculated as sct out in tlic statement of

Accounting Standards (SAS) 9 or Internatioaal Accounting Standards

(IAS) 4-Dcprcciation Accounting; and i~lteruatio~~al Accounting

Standard (IAS) 16- propcrty, plant and equipment. A leased assct is

dcpreciated 011 a basis consistent with the lessor normal deprecation pblicy

of sin~ilar asscts: thc dcpreciablc amount of the asset being allocated on a

systematic basis to cach accounting pcriod during its uscful lifc.

iii. DISCLOSUKE

Disclosure should bc madc at each balance shcet date of the gross

invcstmcnt in leases rcported as finance lease, and tlie relatcd unearned

finance income and unguaranteed residual values of leased assets. As an

indicator of growth, it is often found useful to disclose also the gross

investment less unearned income in new business added during the

accounting period, after deducting the relevant amounts for cancelled

Icascs. Disclosure is somctinics madc of tlic lcssor gcncral Icasing

arrangen~ents and of tlic futurc minimuni paymciit to bc rcccivcd undcr

financc lcascs for spccificd futurc pcriods. Disclosure should be madc of

the basis used for allocation of income so as to produce a constant periodic

rate of return indicating whether the return relates to the net investment

outstanding or thc nct cash invcst~llcnt outstanding in the lease. If more

than onc basis is used, lhc bascs should bc disclosed. When a significant

part of thc lessor busincss conlpriscs operating Icases; thc lcssor should

disclosc thc amount of asscts by each major class of asset together with lhc

rclntcd accumulated dcprcciation cach balance sllcct datc.

Assets hcld for operating lcasc arc usually includcd as propcrty,

plant and equipment in the balance sheet. Sometimes, information is

provided on the lessor general leasing arrangements, the amount of h t a l

incomc from operating lcases and thc n~ininlum future rentals on 11011-

canccllablc lcascs both in thc aggrcgatc and in specificd future periods

(IAS 17).

2.14 EVALUATION OF LEASE ARRANGEMENTS

Evaluating lease arrangeinent is a decision making process in order

to determine whether to lease or not to lease a piece of asset for productive

purposes. It also involves analysing cost data available to the firm with

rcgard to purchase or leasc alternative. In othcr words, the lease versus

purchasc problem is a hybrid, capital budgeting problem that forces the

analyst to consider t11c C O I I S ~ ~ U C I ~ C C S of alternative forins of financing

invcstmcnts, thc lease/purchasc dccision rcquires a standard capital

budgeting typc of analysis as well as analysis of two altcrnativc financial-

packages.

Scvcral modcls of cvaluating lcasc arrangcmcnts exist in literature

on financing management. ,

Some of thcsc n~odcls arc vcry sophisticated that they ntay rcquirc thc use

of computcr to analysc rclcvant data. Howcvcr, very simple casy to usc

model(s) will bc used in this rcscarch work.

I t is assun~cd hcrc that bcforc making this analysis, thc firm has alrcady

decided on thc type of lease-operating lease or finance leasc whicll il is

going to extend. Assun~ing further that the firm decides on executing of

finni~cc lcilsc (bascd on its rcquirements) then two basic issues face thc

analyst, namely:

a. Should the asset(s) be purchased using the firm's optimal financial

mix?

b. Should the asset(s) be financed using a finance lease?

Assunling again that thc second option is chosen, that this, to lease

by financing thc asset, decision has to be further made whether it is going

to be " a straight lease" whereby cqual rental payments are made over the

assct's uscful lifc, or option to purchase lease9'- whereby the lessee firm

acquire the lcased assct at thc terminal lcase period. . I n ordcr to answer the first question above, an analysis of the assct's

nct prcscnt value (NPV) can bc made using the standard method of capital

budgeting proccss. If thc NPV is negative the asset purchase should not be

acccptablc. Ncvcrthclcss, i t may bc morc advantagcous to lcasc thc assct

than to purchase it. This mcans that t l~c cost savings from Icasing might bc

great to offsct the negative NPV resulting from purchasing the asset(s). If,

for instance, a computcd NPV for buying decision is $41 80,000 indicating a

reject decision for an asset costing 44240,000 while a lease decision

con~putation givcs a Nct Advantagc Icasing (NAL) of $460,000. This

shows that the NPV of the asset if leased is $460,000. This can be statcd as

cost = NPV +NAL. Thercfore, the firm through lease should acquire, thc

assct. Pandcy (2000) 1043- 1044.

2.15 NET PRESENT VALUE (NYV) AND NET ADVANTAGE OF

LEASING (NAL)

Thc Net Advantage Of Leasing (NAL) denotcs the ii~cremental

advantagc ovcr the Net Present Value (NPV) of buying thc assct through

normal financing channels. A positive NAL implies that leasing has an

advantagc over thc NPV of the asset as an investment, which may

bc cithcr positivc or negativc. A positive NAL does not by itself imply that

the assct should be acquircd. Thc NPV of the asset should first be assesscd

. as an invcstmcnt. A positive NAL implies advantage to leasing.

I t is possiblc that Icasing may inakc a financially unattractive assct

iilvestnlcnt worthwhile. Suppose the NPV of equipment is negative

~ 4 0 , 0 0 0 and the lessor offers i t under lease terms that have a positive NAL

to tlic buycr, of say, N60,OOO. Thcn tlic lesscc can acquire the asset by

Icasing, and his overall position would bc an NPV of WGO, 000 - 4440,000

l'nblc 2.2. Co~ubinations of NPV n~rd NAL of invcstnrent

1 I Posi tivc I Positivc I Lcasc I

(PV of I nvcst~nc~~t

I I I . . 11. Positive Negative BUY 1

NAL of Investment

and NAL is positivc

otherwise reject.

~ccisioll]

... 111.

iv.

The lessee's overall gain will be enhanced by the positive NAL.

In situation 1, that is, positive NPV of investment and positive NAL

will add.

In situation 1 1, the lessee should not lease because it has a negative

NAL, he should buy the asset through normal financing. One should not

sct of ncgativc advantage of lcasing from positivc NPV, since leasing is

ruled out.

Negative

Negative

Negative

Negative

A

Reject

Lease if sum of NPV

Interpretation of situation (iv) also needs caution. The option of

buying thc nsscts through normnl financing is unclcsirablc sincc its NPV is

ncgativc. Thc lcsscc may acquires thc assct by lcasing if its NAL is morc

than compcnsatcs thc ncgativc NIW of invcst~ncnt. x

2.16 FACTORS TO BE CONSIDERED IN EVALUATING LEASE.

Thcrc arc two major factors to bc considered namely qualitative

factors and tllc quantitative factors or financing decisions.

QUALlTATlVE FACTORS. b

Morc oftcn than not, thc qualitative attributes of a lease end up

creating morc scrious problcms in futurc than its overt costs.

Unfortunately, thesc qualitative attributes arc oftcii grossly unclcr-

c~npliasizcd i n thc evaluation process. Such dangcrous practicc must be

avoidcd. Qualitative evaluation covers such things as:

i. Examination of thc packagc of services to be provided by the lcssor

to deternline thcir lcvel of sopl~isticatio~~ and frcquency. if, for

instance, the lessor happens to possess exclusive expertise in

rcr~dcring such services, thcn the option to lease becon~cs virtually

mandatory.

. . 11. Examination of prcvailiiig policies governing the ownership and use

of thc cquipnicnt, the ratc of capital allowance which i t could attract,

thc ratc of dcprcciation for such equipment, etc.

5 6

i'ii. Dctailcd analysis of operating clauses in the lease, such as

canccllation and rcncwal clnuscs to dctcnninc the ovcrnll risk

csposul-c OF the potential Icasc. OkaSor (1983) 256.

. QUANTITATIVE FACTORS

'Thcrc arc ccrtain principal factors to bc considcrcd whcn cvaluating

lcasc-financing dccisions. A Concrcte decision will be lnade of a carcful

weighting of the nlerits and dcmerits of each option, cspccially in

quantitative terms. Some of the quantitative factors are:

1.

. . 11.

. . . 111.

iv.

v.

vi.

#

Cash inflows and outflows

After tax calculation;

Operating costs;

Cash Rcsidual Valucs;

Comparing Values; and

Rate of depreciation.

Spccifically through leasing an asset, certain costs (or expenses) are

avoidcd or incurred as shown below:

a. Avoids certain operating expenses;

b. Incurs after tax rcntal expenses;

c. Lusscs tax-dcductiblc cxpcnscs associated with intcrcst;

d. Losscs dcpreciation;

c. Losscs salvagc value of thc assct.

f. Does not make the initial cash outlay to purchase thc asset.

Therefore, NAL reflects the cost savings associated with leasing net

of thc opportunity costs of nct purchase. Also thc beforc tax costs of ncw

dcbt in i~scd to discount N A L cash llows othcr than thc salvagc valuc.

Pandcy (2000) 1 045.

2.17 LEASING AND COKPOk\TE PERFORMANCE

In organizations gcncrally, thc tcrm pcrformance is rcgardcd as a

nleasure of achievenlcnt of speciiicd goals or targcts. This may be in tcrms

of sales, timcs taken to complete production, proccss and so on. b

I-Iowcvcr, pcrforrna~icc is dcfincd as a nlcasurc of thc ability to attain or

achicvc ccstain corporate financial goals through Jelibcratcly dcsigncd and

cxccutcd organizational stratcgy in order to gain competitive advantage

against corporate competitors. In finance and accounting\, the fian~cwork

for n~easuring pcrformancc is traditional method of analysing performance

dcvclopcd at the "cIo" and "don't" and by the most popular yardstick of

measuring pcrformance among investors and senior managers is the

Return on EquityV(ROE) as defined.

ROE = Easnings avai lablc for common shareholders Shareholder Equity

= Nct Incomc Equity

Rcturn on cquity (ROE) is nccordcd such importance because it is a

nmsurc of cfficicncy with which thc fiml cmploys owncrYs capital. Othcr

mcasurcs of pcrfornmncc, apart for111 ROE exist, such as, Kcturn On

Investment" (ROI), "Return on Asset" (ROA) and othcrs. Nowever, i t is

not thc intention of this rcscarch to csaminc thcm. Thc many performance

nlcasurcs arc obvious in thc analysis of ratios. Attempts will be made hcrc

to prcscnt schcdulcs or tablcs showing how thc usc of opcrnting or ftnoncc

lcasc can affcct the financial position or performance of a coi-poration. TIE

dccision by mnnagcmcnt to usc Icasing as an alternative source of dbbt

financing and its inclusion in the financial statements has far reaching

implications on reported financial performance of a corporation. Thcse

financial implications arc dcpcndcnt on the typc of lease- operating or

financc lcasc cxccuted, which also dctcrn~ines how it is trcated in treated in

thc financial statements.

Operating (service) lcase is coi~sidcred and trcated as an expensc in

the income statement and as a result does not affect the balance sheet.

Finance lcase on thc other hand is considered as acquisition of an

asset through an instrument such as loan. Therefore, finance lease is shown

on the financial statement as if it is a purchase. The leasc payments

(periodic rcntals) arc rcgardcd and trcated as principal and intercst

paymcnts on incomc statcmcnt, but intcrcst on tllc loan and depreciation on

thc assct do appcar on thc income statcment.

As notcd carlier, the use and inclusion of lcasing as an alternative

source of dcbt financing i n thc financial statcn~cnts can enormously affcct

a company's reported profitability and o h x jwlbrtnancc mciisurcs

Emekekwuc (1 997) 446-447.

As an illustration, EM10 Intcrnational PIC ilccds to install an

automatic cashing machinc, which will be acquircd in 1 '' January 2004 and

will have a fivc-ycas life sp;in for accouiiting and tax purposes. 'I'lic

machine acquisition can bc financcd with a 10 pcrcent installmental

scpaymcnt loan and purchased at N150,OOO. Rental payrncnt will ' lx

4439,570 at thc cnd ofcach year for fivc years. It is also envisaged that tlic

machinc would have no salvagc valuc. How can thc decision to cxecutc an

opcrating, finance or purchasc leasc affect thc financial pcrformancc of

EM10 intcrnntional Plc.

I t should bc notcd from abovc that if thc lcasc is considcrcd an

opcrating lcasc, thc corporationlcompany will show a lcasc cxpcnsc of

Pi39,570 on thc income statement and thc balance sllcet will be unaffcctcd.

The financial positions of EM10 Intcrnational PIC on the two types of Icasc

with othcr figurcs are shown below.

Financial statcmcnt lof EM10 Intcrnational Plc, on the opcrating

and finilrlcc lcasc altcrnativcs.

PKOFOMA 1 2004

Salcs

Cost of sales

Administsativc Expcnses

Depreciation

Lcasc Paynlcn ts

Intcrcs t Expcnscs

Earnings Bcforc Tax

Tax @ 30%

Earnings after tax

Total Assets

Dcbt

Equity

Profit n~argin (nct Incomc/salcs) 1 1.4%

Rctum on Equity (Nct Incon-~cIEquity) 19.0%

Operating Financc

leasc leasc

PC 000 PC000

800 800

(4 8 0) (480)

320 320

(120) (120)

(40) , (70) #

(39.6) - -

(30) (45)

90.4 85

(27.1) (25.5)

63.3

BM 920

320 440

480 - 480'

BM m operating Finance

lease lease

7.9% 7.4%

13.2% 12.4%

Rcturn on Assets (Net IncoinelTotal

ASSC~S) 1 1 .O%I 7.9% 6.5%

Dcbt Total Asscts Ratio 0.4% 0.4% 0.48%

'Ilic abovc shows tlic impact ol'opcrating lcasc and finance lcasc on

financial pcrformancc of a iinn. With tlic fina~icial leasc, thc Inconic

statcnicnt will not rcflcct a Icasc paynlcnt but will only show dcprcciation

on the asset and intcrcst on loan. Thc finance lcasc resultcd in an incrcasc

of M5,OOO in cxpenscs (depreciation and interest on loan).

I n tlic income statcnicnt, wlii lc ~l ic operati~lg lease increased by h c

lcasc rcn~al paynicnt of 44 39,570.

Tlic operating lcasc did not l w c any cffccl on tlic balance shcct.

Total asscts at tllc cnd of 2004 would incrcasc by N 20,000 (LC.

4 1 50,000 less annual depreciation of N30,OOO). The finance lcasc would

increase by the samc amount and reported debt would bc higlicr by thc

samc amount assuming no changes in other assets and equity.

I t should be observcd that given all abovc, profitability and otlicr

pcrfoi-mancc lncasurcs of the company declined irrcspective of the nlelhod

of acquisition. This is becausc the machine did not generate revcnue or has

salvagc valuc.

Altcrnalivcly, if tlic inachinc will gcncratc rcvciiuc or iinprovc sales

thc financial pcrformance of EM10 International Plc wilI improve. IS the

~nacliincd is cxpected to increase saIes by 35 percent, cost of saIes by 10

pcrccnt and administrntivc cspcnscs by N20,OOO.

Financial Statcnicnt 2 of EM10 International Plc on thc operating

and financc lcasc altcrnativc PROFOMA 2 2004.

Sales

Cost of sales

NO00

800

(480)

320

Administrative Expcnscs (120)

Dcprcciation (40)

Lcasc Paynicn ts --

Intcrest Expciiscs (30)

Earning BEFORE TAX 130

TAX @ 30% (3)

Earnings after tax 2!=L

Total Asscts 811P

Dcbt 320

Equity 4yo

8-QQ

Profit margin (nct Inconic/salcs) 1 1.4%

Lcasc:

NO00

1080

(528)

552

( 140)

(40)

(39.6)

(3)

302.4

(90.7)

21 1.7

m 320

480 -

m 19.6%

Lcasc

NO00

1080

(528)

552

( 140)

(70)

Rcturn on Asscts (Nct Inconle

/Total Assets)

Rcturn on Equity (Nct

Incomc / Equity)

Dcbt Total Assets Ratio

From abovc, i t can bc SCCII that the fillancial pcrformancc of thc

company trcmcndously by impsovcd and also thc capital structure

improved when the casting machine generates or inlproves sales. This

shows that lcasc financing, whcthcr operating or Gnancc lcase, can bc'i~scd

as a stratcgy to i111psovc corporatc capital structure. This advantage occurs

to such a firm whcn that operation and application of lcasing as an

altcrnativc sourcc of dcbt financing is understood and appropriately

applicd givcn appropriate corporatc economic conditions. I-Iowever, it

should bc carefully notcd that thc impact of financial lease or a purcllase is

substantially worsc tl~an the impact of an operating leasc.

Lcasc analysis focuses mainly on cash flows. Ncvcstl~clcss,

management in designing its reward system to managers can use it. This is

because management reward systems are often based on reported income

and financial statements provide information to creditors, prospective

invcstors and sllarcholdcrs as to thc financial hcalth o f a corposatc body.

REFERENCES

ANI, M. (1996) Thc 1995. bi~dgct breakdown, Daily Timcs, Lagos, Jan 5.

BEALEY, R.A Sr MYERS, S.C. (1988) Princiules of CO;-~oratc Financc

Ncw York McGraw liill Inc 3rd Ed.

CI-IASTEEN L.C, FLAI-IERTY 1I.E Sr O'Coilnor, M.C (1987),

lntcrmcdiatc account in^ Ncw York, Random I-lousc Busincss

Division. 2nd Ed.

b COLLIEII, P.A, 001W T.E &CLUN,J.J (1988) 1;inancial and Treasury

Management, Oxford Butterworth Heinenlanil Ltd.

COPELAND T.E dk WESTEN, F.J. (1992) Financial Tlicory and

Corporate policy, Ncw-York, Addisison Wcilcy Company.

3" Ed.

ECBUNA E. N. (1995), " Equipment leasing in Nigeria Trends and

13-ospccts," CBN Bullion, vol. 19, No 3, July/ September.

EMEKEKWUE P. E. (1997) Corporate Financial Manancinent,

Kinshasa-Zaria, African Bureau of Educational services 3'"

ed.

NELSON T.A. (1994), The Impact of Lease on Financial Analysis,

Burcau Of Busincss ND Econoinic Research, East Lansing

Mich, Graduate Schools of busincss Administration,

OKWUOSA 1. (1998) Oucstion and Answers on Nigerian and

111tcl-national Accountina Standards, Lagos Okwuosa & Co.

PANDEY, I.M, (2000), Financial Management, Ncw- Delhi Vikas

publishing tlousc PVT LtJ. 8'" Ed. '\

SAMUELS, J. M, WILKES. F.M & BRAYSHAW R.E. (1997)

Thompson Business Press, 6'" M.

Financial Accounting Standards Board (1976) "Accounting for lcascs"

Statement of financial Accountinn. No. 13 Standford, #

Intcrnational Accounting Standards (IAS 17) (1994), "Accounting for

lcascs" I~itcr~iiitio~ial Accountinp Standard Committcc.

Statcmcnt of AccounLing Standard (SAS 19) (1996) "Accounting for lcascs

Nigcrian Accounting - Standards Board.

CHAPTER THREE

3.0 IWSEAKCH DESlGN AND METHODOLOGY

3.1 RESEARCH DESIGN

It would llavc bccn bcttcr to carryout an ir~vcstightion in all quoted

coq~oratc organisations for cxccllcnt achicvcmcnt of thc bcst possiblc

result. Howevcr, such largc population and limitless scopc would posc

problcnls on coverage, financc and time factor. As a result of these, we

have decided to concentrate the investigation on Eight Quoted

Compa~lies in Enugu Metropolis and to cover between, 1992 to 2001 .b

We design our sourcc of rclevant primary and secondary data and

tailor it to thc statcincnt of problem and objective of the study. There is

also cffcctivc dcsign of rclcvant instrunlcnts for data collection and

analysis to bc applicd in ordcr to arrivc at a satisfixtory conclusion.

3.2 RESEARCH METHODOLOGY

Thc metl~odology used is designed in such a way as to collect data

very relevant to the research topic- bbCorporate leasing as a strategy for 0

improviiig corporate financial structure". To get data and/or

information casily from thc managcmcnt and staff of thc companies, we

applicd survcy-mcthod of gathering data and/or information t.lius-

qucstionnaircs, intcrvicw, observation and reading. All the methods wcrc

designed in such a way as to remove bias from the information andlor data

cullcctcd.

3.3 SOURCES OF DATA

This rcsearch work applicd two major sources'of data collection

namely:

i. Primary Data; and

. . 1 1 . Sccondary Data

PRIMARY DATA- Virtually all rcsearch of this sort requires the usc of

primary data as inputs. Thc primary data is usually sourced througli the

administration and distribution of questionnaires, oral interview and

obscivation. Duc to LIE scnsitivc naturc if the projcct topic, we shall rcsort

to all primary data source methods at va~ying degrees in ordcr to

substantially achicvc thc objective of the research project.

SECONDARY DATA- This is always sourccd through reading. In

addition to primary data sccondilry data is obtained from relcvant

textbooks, journals, accounting standards and relcvant publications.

3.4 POPULATION O F THE STUDY

Thc arca of this study is Enugu metropolis of Enugu State. The

sludy will look inlo cight quotcd companies involvcd in Icasing. 'Thc

population of rllc study is cstimatcd at about 400 personnel of the cight

cpotcd conlpanics locatcd in Enugu metropolis na1ncly:-

68

Union Investments PIC (A subsidiary of Union Bank Plc.)

Unitcd Uank for Africa Nigcriil Plc.

1:irst Bank of Nigcricl PIC.

Alric Bank PIC

Unipctrol Plc.

AGlP Plc

-Tcxaco Plc.

Lcver Brothers PIC.

# The eight quotcd companics are acting as both lessor and lessee.

Thcy operate business as lessor and as lessee.

3.5. SAMPLE AND SAMPLING PROCEDURE

170r tllc purposc of this study, Yaro Ycmcui's forn - detcl-minc the manageable samplc size out of thc estimated population of

400 people from the eight quoted companies. Yaro Yameni's formula used

for the determination of thc sample size is as below:

wherc: N = population of thc eight companies

n = samplc sizc of tllc cigllt companics

c = Significant of errors of 5%

1 = Constant

Thc abovc fornlula can bc substituted as below:

The total sainple size of the respondents for this rescarch is 200.

#

3.6 INSTRUMENTS OF THE STUDY

The instruments used for the study are oral interview, observation,

rcading and thc distribution of questionnaires, which was fillcd and

rcturncd by thc respondents. The questionnaires aim at finding out some

problems, weaknesses, advantages and prospects of lease financing.

Validity of the Instrument: The interview of some management staff and

chicf cxecutivcs of the companies aimed at getting facts from valid t

source. Observation and reading confirmed the relevancy of facts collected

through oral interview and questionnaire.

Reliability of the Instrunleiits: The instruments arc the rcliable methods

instruments of fact finding. T11cy arc reliable because almost all the

management staff and some chief executive responsible for leasing and

lcasc financing in the sclected conlpanies are respondents.

Method of Administration of Instruments: Simply designcd

qucstioilnaircs wcre sent to thc respondents to obtain cxperts opinion on

thc ficld of study. Pcrsonncl oral intcrvicw was also grantcd to sonlc

managcillent staff and chief executive rcsponsible f i r lcasing i n thcir

rcspcctivc companies.

3.7 METHOD OF DATA ANALYSIS

Simple descriptivc analytical techniques are used in analysing thc

# data collected. Thc collcctcd sample data will be tabulated and presented in

simplc percentage analysis tables and analysed theoretically. Howcver,

tests of the hypothesis shall be confirmed using the statistical "coefficient

of orr relation" and "chi-Square".

3.8 TEST OF E-IYI'OTIIESES

In attempting to rcach decisions, it is useful to make assumptions or

guesses about the population involved. Such assumptions, which may or

may not be true are called statistical hypotheses and in general are

statemcnts about the probability distributions of the population.

In mnny instanccs, wc Fornlulatc statistical hypotheses for the sole

purposc of rejecting or nullifying it. For example, if we want to decide

whcthcr onc procedure is bcttcr thnh another, we formulate the hypothesis

that thcrc is no diffcrcncc bctwecn the procedures (i.e. any observcd

ificancc or rules o f

3.9 DETERMINING A N D TESTING LEVEL OF CONFIDENCE

I l\~potlicsis is all idca. wliich guiclcs the rcscarchcr i n reasoning or

susscstio~i. or i~ s~ ic~i t i l ic ~ I I C S S 111;1t is yet to I > c provcd correct. '1'hcrcfi)rc.

d w 10 ~ l i c ~ialwc. ol'lliis s~utly. I~olll tllc coef'ficien( of'correlation "r" and

c h i - s q ~ ~ : ~ r c " ~ 2 ~ I I ; I I I Ilc 11sc.tl lo lcsl I I I C Iiypo~licsis

o l ~ ~ - \ u i x2 is Icss tliai~ the tabled valuc, we acccpt thc nul l hypothesis and

Tylw 1 crror occurs i l ' \vc rcjcct a Iiypotlicsis whcn it should bc

'1'yl)c 1 1 cr.ror.s occur i I' \vc acccpt a Ilypothcsis whcn it should bc

l'ilblc 4.2. Allocation ;~ntl I<ctr11.11 01'Qr1estionnaires

I<cl I I rncd I<cf 11 rncd I

L - - - - -- - 1 .. - -

\ hiiori In\ c s t ~ w ~ ~ t PIC I

? L.csscc 15 7.5 15 7.5 -- I

I 1

7.5 I .cssor 15 I 7.5 I -. - - - - -- - --

1 First 1w11k 01' Nigeria:

I Icsscc

I .CSSOI' I

Lessee I

l:so~li tlic tal~lc above. i t \ \ ) i l l be ol~scs\~cd that out ol'u total number ol't\t.o

1ii1riri1~cd 01- 100'?4 q ~ ~ c ~ t i o ~ i ~ i i ~ i r e s ;~iI~iiinistcr~d, 180 or OO?h wcrc completed

m d rcturlicd f'or a~ialysis wliilc tlic rcn~ainilig 20 or 10% wcrc not rcturncd.

'l'hc rcasoll I'or sucli distributioli is to enable us has cnough data and #

inlimiiatiou to scacli a bcttcs conclusion. Sc\lcral visits wcrc tnadc to the

111 clioosin~ tlic location liw this rcscarcll. we tlioi~glit i t ncccssary to

rclati\.cl!. high a id \\,iicrc Icusc finalicing as a11 alternative source of'

linancc is rccogniscd atid practisctl bq the identilicd economic sectors in

sciatioli to tlic cconolnic cl'lkcts to 11s at the end ol'thc research work,

'I'his t~ccd. i n l i~ r~ i i~ i i tlw clloicc 01' 1~1ii1gi1 state metropolis. (icncrally.

opcratilig) in order to ol>tai~l ~ l i c ~.ciluirctl l i )m 01' capitill liccdcd f i r their

opc~.:itio~is.

4.3. PRESENTATlON AND ANALYSIS OF RELEVANT DATA. .,

In ordct- to satisfy thc ol~jcctivcs of this study, wc now procccd to

analysc rclcvant data collected tllrougl~ questionnaircs administered and

collcctcd, and also summarise the answers on oral interview conducted.

Qucstiou 1- Is leasing as an altcrnativc instrumcnt of financing a projcct

known to your company'?

' Answer

From the table abovc, 174 of the respondents coilstituting 96.7%

alrcady know lcasing as an alternative instrument of financing a project.

The remaining G or 3.3% claimed that they did not know leasing as such.

Howevcr, with 96.7% affirming knowledge of lcasing as an instrument of

project financing, it can be safe to conclude that leasing as an alternative

instrumcnt of projcct financing has bcconle widely known.

Table 4.2 ---

Optiou

Yes

* No

Total

Lessee

88

2

90

Lessor

86

4

90

TotaI

174

G

180

Percent

96.7

3.3

100.0

7 8

~ u e s t i o u 2: How frccq~icntly do your company apply leasing to financc

somc of hcr projccts?

I Option

Vciy frcqucntly t--- Occasionally

TOTAL

Lessec Lessor Total Percent d

The table above shows that 14 or 8% alld 36 or 20% of thc

rcspondcnts wcre of tllc opinion that leasc financing is applied

occasio~~ally and frequently respectively while 130 or 72% of respondents

wcrc of thc contrary view. They statcd that their company vcry fiaequcntly

apply Icasing to financc hcr projccts. I t can, therefore, bc deduced that vcry

frcqucntl y application of Icasing to financc projccts dcpicts that Icasc

financing is v c ~ y popular anlong companies as a source of corporate

financc.

rchase and thc later prcfcr bank financial house loan. A further analysis

rcvcals that out of thc 90 lcssor rcspondcnts, 44 claimed that bank financial

housc loan is casicr and marc convcnicnt to arrange and exccute. Out of

thc remaining 46.8 say i t is hirc purchase and 38 say it is lease financing

that is casicr and morc convcnicnt to arrangc and executc. Iierc, the lcssor

~ ~ \ V O U I . S tinnnciall bank loan.

In thc casc of lcsscc rcspondcnts, 58 out of 90 agrcc that lcasc

financing is casicr and morc convcnicnt to arrangc and exccutc. I I and 21

say it is hire purchase and bank1 financial housc loan rcspcctivcly that is

casicr and morc coi~venicnt to arrangc and cxccutc. The lessces favour

lease financing.

Surmxarily, with 96 or 53% respondents in support, we coi~cludc

that lcasc financing is casicr and morc convenient to arrange and cxcqute.

Qucstion 4: On thc avcragc how long docs lcase fii~ancing last in your

firm?

Table 4.5

I Option /Duration I Lessee / Lessor I Total I Perceut

Bclow 5 ycars

Above 5 years and below

10 ycars

Abovc I0 years

Thc table shows that 117 or 65% of' the respondents fivour

csecuting lcasc contracts of 5 years and below, 45 or 25% support lcasc

59

Total

19

12

58

90

--- 26

G

117

9 0

65.0

45

18

35.0

10.0

180 100.0

YO

contracts of above 5 years and 10 years and the remaining 18 Or 10%

prc1i.r nbovc 10 years Icasc contracts. Summarily, lcasc contracts of 5

ycars and bclow are prcfcl-rcd.

Question 5: Leasc financing has becomc vcry popular in con~panies

bccausc of'tllc enormous problcms o r applying othcr financing methods.

Tablc 4.6

I I Options I Lessee I Lessor I Total 1 Percent I

The table depicts that lcasc Financing has become vcry popular in

co~npanics not bccausc of cnormous problems of applying othcr financing

methods. 126 or 70% out of 180 or 100% of the respondents confir~ncd i t

by stating in thcir return questionnaires that the slatement is false.

Qucstion 6: Does a decision to lease an asset depend on the corporate cost

of capital'?

' " Truc

Falsc

-. - - Total

-

30

60

- -- -- 90

24

66

- - - 90

54

126

. --

180

30.0

70.0

---

100.0

@

Table 4.7

Here, onc can convincingly concludc that since 141 or 78% are in

1

support, a decision to lease an asset usually depends on the corporate cost

b of capital.

Options

No

Yes

Total

Question 7: The provision of solution to coi-poratc cash flow problems

without significant corlscqucncc by Icasing ~nakcs i t popular among

Lessee

18 .--

72

90 ---.

Table 4.8

-- Lessor

2 1 ---

69

90

'She t;iblc nbovc shows that 153 or 85% out of 180 or 100% of l l~c

~~cspondcnls stated that Icasing is popular among companies because i t

provides solutions to corporate cash flow problc~ns without significant

conscquences to the company.

Options

True

False

Total

I

Total

39 - ------

141

180

Lessee

80

10 --.

90

Percent

22.0 ---

78.0

100.0

Lessor

73

17

90

Total

153

27

180

Pcrccnt

85.0

15.0

100.0

,

82

Question 8: There are two types of leases operating and financc lcascs.

Which ol'll~c Lwo do your culnpany pr'cl'cs'?

About 79 out of 90 lcsscc rcspondcnts prcfcs operating lcasc while

. h c mmilining 1 1 out of 90 pmfcr financc lcasc. 111 k c casc of lcssor

rcspondcnts, tlicy arc indifferent as they cqually favour operating and

financc Icascs.

Question 9: Do govcrnmcnt taxation policies affcct thc usc of lcase

financing?

Table 4.9

Table 4.9 indicatcs 33 or IS% of tlic respondents are of tlic opill

tliat govcriin~cnt taxation policics do not affect thc use of lease financing.

The majority, 147 or 82% state that govcrilnlent taxation policies affect Llic

usc of lcasc financing. Wc col~cludc hcrc tliat govcn.imcnt taxation policics

affcct tlic usc of lcasc financing by companies both lesscc and lcssor

diffcrcntly in various degrccs.

~ o t n l y Options Lcsscc Lcssor

83

Q~icstion 10: I n which direction would you assess the effect of

govcrnmcnt taxation policics to lcasc linancing policy ol' your company?

osi T T r.i LESSEE LESSOR TOTAL PERCENT

Thc tablc shows that 128% or 71% of thc rcspondcnts arc of thc

Incrcasc in taxation rcsults incrcasc in leasing Increase in taxation results rcduction in leasing ----- Rcduction in taxation rcsults incrcnsc in leasing

opinion that incrcasc in taxation results to increase in leasing, 12 or 7%

state that increase in taxation results to reduction in leasing while the

6 5

G

19

90

rcmaining 40 or 22% stated that reduction in taxation results to increase in

Icasing. Wc, therefore, conclude that increase in taxation results to increasc

63

6

2 1

90

in Icasing.

Qucstioii 11: Does your company have an established systcm or model for

128

12

40

180

evaluating thc proiitability and/or cash flow implications of lcnsc

71 .O

- 7.0

22.0

t

100.0

transactions?

I --- - ----- - - - .-----

Options / Lessee / Lessor / I G Z Z

As ~*cvcalcd in tablc 4.1 1, 169 or 94% of the respondents of the

samplc sizc havc cstablishcd systcm or model of evaluating thc #

profitability andl or cash flow implications of lease transactions whilc 1 1

or 6% do not havc such modcl. Thc result of this pcrccntagc analysis

dcpicts [hat conipanics using Icasc financing (Icsscc or Icssos) do apply

silcli ncccssilry mechanical n~odcl(s) to apprai:;~ tllc rctunls or bcnclits of

such lcasc.

Question 12: Finance lcasc and oycsating lcasc involvc lcasc contract

costs and other costs. Which of them is more costly than the other?

Table 4.1 2

Options

Finance lease

Opcsating Icasc

-- --- .- -- No cost diffcrcncc

- Total

24

- .-- 5

90

GO

- 7

- 90

8 4

---- 12

180

47.0

- 6.0

100.0

Tlicre is no differcncc between the respondents, who, state that

finance lease is costlicr and thosc who statc that opcrating lcasc is cos~licr

as botli luvc 84 or 47% in support of both sides. Thc renlaining 12 or 6% \

arc of the opinion that tlicrc is no difrcrcncc i n cost of opcrating mid

financc lcascs.

A closcr look disclosc that 61 out of 90 lcsscc rcspondcnts claim that

lii~ancc Ic:~sc is cosllic~., 24 oul of 90 say that opcrnting lcasc is costlicr

whilc the balance of 5 out of 90 concludc that thcrc is no diffcrcncc #

bctv?ecn thc cost of iinancc and opcrating Icascs. I-Icrc, thc lcsscc

concluded that financc lcasc is morc costly than tlic opcrating lease.

I-Iowcvcr, Icssor rcspondcnts see i t differently, as 60 out of 90 statc

that operating lcase is costlier, 23 out of 90 say that finai~cc lcasc is costlics

and thc remaining 7 out of 90 arc of tlic opinion that therc is no diffcrencc

as to the cost of financc lcasc and opcrating lcasc. The Icssor companies

are of the opinion that thc cost opcration of operating that the cost of

operation of operating lease is more.

Surmnarily, thcrc is a difference in the opinion of lessees and Icssor.

Thc lcsscc statcd that tlic cost of finance lcasc is more whilc thc lessor

states that tlw cost of opcrntillg lcasc is morc. 'l'l~crcforc, cost is depcndcnt

variablb of'cvl~cthcr thc company is a lcssec or a lessor.

-To a Icssor company, opcrating lease is costlier.

-To lcsscc conlpany financc lease is costlier.

Questions 13: How would you assess the duties of trustees as regards to

leasc in Nigcria?

Table 4.13

Lessce Lessor Total ~crccnt' \J8F Vcry cffcctivc

The table shows that 68 or 38% are of the opinion that trustees are

vcry cffcctivc whilc 73 or 40% supports that trustees are cffective and the

balancc of 39 or 22% say that the trustees are not effective.

Not cffcctivc

Total

Wc, thcrcfore, conclude that thc trustees are between the rangcs of

cffcctivc and vcry cffcctivc which shows that there are room for their

I8

90

improvement 011 the sel-vices t h y render regarding lease contracts. The

lessecs arc clcarly saying that the trustees are effective while the lessors

arc saying that the trustecs are very effective.

2 1

9 0

Question 14: How would you assess the development of leasing in

Nigcria?

3 9

180

22.0

100.0

The table depicts that 14 or 8% of the respondents agree that leasing

----.--------.-

Options

Undcr dcvclopcd -- Dcvclopcd

Developing

-- Total

t is under-dcveloped in Nigcria, 47 or 26% say that leasing is dcvcloping

and thc major rcspondcnts 1 19 or 66% bclievc that lcasing in Nigcria has

dcvclopcd.

-- lDc~-ccn t

S.0

66.0

26.0

100.0

Lcsscc

S

54

28 .

90

Thc perccntage analysis with 119 or 66% of respondents proposing

that lcasing in Nigeria has dcvelopcd, wc thercforc, conclude that it is true.

- --.----- 1,cssor

6 -

65

19 --- 9 0

4.4 ORAL INTERVIEW

Somc of the officers of the lcssee and lessor companies were

interviewed such as the chief executives, directors and management staff.

Thcy wcrc askcd thc following six questions undcr which the summary of

thcis submissions follow viz.

Question 1. How would you relatc lease develops to the development of

Nigcria?

--.--.-- 'Totill

14 -- 119

47 - 180

Answer: Nigcria is a dcvcloping country but leasing in Nigeria has

dcvclopcd. Leasing has dcvclopcci but what makc many pcoplc think

othcr~visc is bccai~su Nigcria is dcvcloping. Thc problcm is thosc

governmcnt policics, which guidcs thc opcration of lcasc cl~angcs almost

annually, and this makcs leasing to be as if it is developing. The Nigerian

citizens and corporation liavc known the bcncfits of lcasing, how to

cvaluatc lcasing ar~.angcmcnts (finance and operating leases) pros and cons

of leasing and the implications of different government policies on leasing.

Therefore, lcasing in Nigcria has clcveloped since tlie players in thc s&tor

just watch govcrnmci~t policics, inanipulate it and apply it to their bcncfit

after cvaluating all the quantitative and qualitative factors effecting lcase

financing.

Question 2: In answering the questionnaires, you stated that a decision to

lease an asset depend on the corporate cost of capital. Why?

Answcr: A decision to lease an asset depend oil the corporate cost of

capital because the company's capital structure with its individual typc of

finance interest ratcs or return, tax rates and profit of the conlpany are

aggrcgately considcred to arrive at the colyorate cost of capital. What the

company usually do is just use thc company's cost of capital to evaluate

thc cash flow to determine the acceptability or non-acceptability of thc

Icasc.

The application of thc corporate cost of capital will enable the

company to cvnluutc tllc Icnsc by applying thc Nct Advantagc of Icnsc

(NAL) and Nct Prcscnt valuc (NPV) and striking a balance between the

two for ultinlatc acceptability or rcjcction of lcasing tllc'nssct.

Qucstion 3: Qualitativc factors arc often ignored when evaluating leascs.

How arc thcsc considcrcd and by who?

Ans~vcr: Thc consideration of qualitative factors in leasing is vely vital.

This is bccause its cffcct may not affcct the particular lease contract but the

company as a wholc. Qualitativc factors must be critically cvaluatcd. b

Thcrc is gcncrally no proccdurc evaluating qualitative factors but is always

cvaluatcd by thc Director-in-chargc of leasing andlor the chief Executive.

Qualitativc factors rclating to lcashg arc ncvcr ignorcd becausc of thcir

deadly cffccts on thc coyorate imagc of the lcsscc or lessor company.

Question 4: There are two types of lease, which type do you prefer and

why?

Answer: The interviewee are indiffercnt as to their preference but said that

thcir preference dcpcnds on thc cash flow inlplications of the lease

contract. Thcy stated that what may cause or result to preferencc is

cmbcddcd in thc operation of the finance or operating Icase. Generally,

thcy bclicvc that:

- Tllosc who prefer operating leasc state that they want to achicvc

profit target without any effect on the con~pany's capital structurc.

Thcy bclicvc that this gcncrally enhanccs corporate imagc and

financial position of thc company.

- Tl~osc who clloosc financc lcase statc that thc use of the

Lcascd asscts can bc manipulatcd to thc advantage of thc lcsscc

Co111pa11y.

- 'I'hc lcascd assct can bc rclcascd to other companies on operating

lcasc wllcn not in usc or if therc is under-utilization and hencc nuke

morc profit than projcctcd. They are of thc opinion that a company

can cngagc il l financc lcase to enable her opcratc an opcrating kasc

providcd that shc satisfics thc contract of thc finallcc Icasc-holdcr

and the opcrating lease holdcr do not fail.

Qucstiou 5: Sincc this rcport is purcly for acadcmic purposcs and for the

companics undcr study, plcasc, could you allow us collcct somc data

rcgarding thc trcnd of both financc and operating leases in your company

duc to govcrnmcnt tax rate changes or variations?

Answer: You arc allowcd but confidentiality is our watchword, otherwise

you may bc sued if you do otherwise. Do not publish any figure relating to

our company alone but you can suin i t up with other company's data.

On the ground of the above, which all the cight companics gave us,

wc hcrcby prcscn t thc total of thc data collcctcd thus:

Ycw Tax Ratc lcsscc lcssor

1992 40% 222 254

1993 35% 190 210

I994 3 5% 163 202

1995 35% 182 205

1996 3 5% 173 199 \

1997 35% 165 196

1998 30% 176 172

1999 30% 156 1 84

2000 30% 166 173

200 1 30% 157 165 #

The avcragc lcsscc and lessor for the thrcc diffcrcnt tax ratcs is hcrc

utldcr statcd.

Ycars Tax Ratc Avcragc Averagc

Lessee lessor

1992 40% 21 1 2 54

1993- 1996 35% 177 204

1997-200 1 30% 1 64 178

Question 6: Is any advantagc (s) in lcasing tllan thc outright purchase?

Answer: Thcre arc enormous advantages but the ones that are vciy

rclcvant arc the factors, which will bc used in evaluating the cash flow

implications of undertaking thc leasc contract. Thesc factors and

advantages includc:

- It is a tax-deductible cxpense and therefore reduces tax liability;

oniourit ol' money in relation to

)I'tI1c year, which means that the

company uses the amount liw the ycar bclhrc payment:

- I'lic risk ol'obsolcsccricc atid ~~iai~itcliarlcc is ignored i 1' i t is an

o p ~ . ; ~ ~ i l i g Iciisc: atid lllc picccriical payment is a cash release t o the

. . . . Icsscc cotiIl>iIti!; I I 11 IS a linarlcc Icasc.

4.5 'TESl7IN(;, ANAI,YSIN<; A N IN'I'T?I<I'RT?'TIN(; ' THE

H Y P O I ' l 1 E S l S

'I'cs~ing 01' Ilypotllcscs is at1 iniportarlt aspect ol' any research work.

111 lhis \\.01-k. ~ l i c Ii!yo~llcscs to hc ~cstctl arc ~liosc postulated in chapter

one. 1'Iic rciccticw or \'i~lidity 01' rllcsc I lyp~) t l lc~c~ shall depend 011 the data

annl\.scd it1 this cliaprcr.

I ; I p ~ ~ q w s c 01' tcst iny tlic liy pothcscs chi-squarc fx2) will he

used to tcst tllc tlircc lq.potl~cscs while cocl'licicat ol' corrclation (r) will

be uscd to tcst Iurthcr the Iiyp~thcsis 3.

Chi-Sauarc : YS1% lcvcl ol'conlidcncc or signilicancc is choscn whilc

5". Ic\,cl 0 1 ' ~ I T O I . is i~ssunicd. l l ic li)l.lil~~li~ li)r cI1i-Sqi1~1r~ is statcd

tlius.

Cocfficient of cot-rcl;riion( I-): 'I'llc limnilla li)r calculating r can be

Wl~crc. 11 = tlic n i ~ m bcr 01' pairs.

4.5.1 DECISION R U L E

Ic\.cl 01' conlidctlcc. thc alter-native hypothesis is rqjcctcd and nul l

In ordcr to dctcrlninc tlic dcgrcc 01' I'I-CCCJOI~I, V, wc makc usc of this

... I . 7,cro or I I O Correlation 0

I .case lilia~icing is ~iiorc colivcliic~it li,r a Iirni to arrange and cxccute than

V - I)cg~.cc ol' li.ccdolii (V) - - - ( I < - I ) (C- I )

Note: The i11)ovc sy1111)ols a11d ( I ~ l i ~ i i l i o ~ ~ s rcrnain throughout this

project to cspli~in test statistic.

Ikjcct ion and critical valw at 11111 I and altcrnativc hypo~hcscs. Detcrnliniltioll of expected frequency (Ej)

Options

# ( i ) lii = 90 x 96 = 48 --

I 80

(iv) Iii 00 x I9 - 9.5 1 80

(vi) I $ -- 90 x 05 32.5

. . 2 1 I~crchrc, XI . or 12.78 > Xo2 or 5.99.

Sincc, 1 2.78 > 5.99, wc rcjcct 1-10 and acccpt I-Ii. Thc decision is that

lcasc financing is not nlorc convcnicnt for a firm to arrangc and cxccutc

than otllcr sourccs of dcbt financing.

B. TESTING OF HYPOTHESIS TWO

NULL HYYO'THESIS No

b. l'hc usc of lcasc linancing as an allcrnativc source of dcbt financing,

is dcpcndcnt on corporatc capital structure and intcrest ratc or ratc of

rcturn.

ALTERNATIVE HYPOTHESIS HI

Tllc usc of lcase financing as an alternative source of debt bct

financing is not depcndent on corporatc capital structure and intcrcst rate

or rate of return.

Thc information for tcsting hypothesis two is obtaincd form

questionnaire 6, which was analyscd in tablc 4.7 and reproduced thus:

'l'cst statistic

Options

No

Yes

Total

Thc dcgrcc of freedom, V= (2- 1) (2- 1)

Fig 4.2

b

Lcssec

1 S

72

90

Rcjcctio~~ a~ici critical valuc at 0.05

Lessor

2 1

69

90

Total

39

141

180

DECISION RULE

Acccpt I-lo < xo 2

iicjcct 1-10 if X I 2 > %02

Determination of Expccted Frequency (El)

Thc detcnnination of cxpccted frequency, which will be uscd to

analysc hypothesis two is as hllows:

1 , E, = 90 x 39 19.5 (ii) E = 90 x 39 = 19.5

i i i . E, = 90 s 14 1 = 70.5 (iv) 180

Options Oj

Thereforc, or 0.3 < %02 or 3.84.

Sincc 0.3 < 3.84, wc acccpt Ilo and reject Hi. The decision is that

thc usc of lease financing by companicslfir~ns as an alternativc source of

dcl~t liri;l~i~itig is dcpctidc~it or1 ilitcrcst rate or rate or return and corporate

capital stri~cti~rc.

C . I~ES'I'ING OF t IY I'OI'I I ICSIS '1'1 I l tIClC

NIILL IIY1'07'1IESIS Ilo

'l'nsation policy 01' go\lcrrlliicllt hiis significant effect on the

corpor;~tc Icasc lilialicing policy.

AL'l'E14NArllVlC IIY lDO'lslllSIS l l i

'l'mat ion policy 01 ' govcr~inicnt his no significant effect, on the

cor.pcw;~tc Icasc lilialicilig pol icy.

'I'llc irlliwriiutio~i liw lcstirig Iiypotlicsis tlircc is cxtractcd from

-- -- - -- -- - --

J No 18 133

. . -- - - - - - ! Ycs 7 2 147

L.. -

I 7'otol 00 1 R0

Tcst statistic:

The degree of freedom, V = (2-1) (2- 1)

v - 1x1 = I

Fig 4.3

n 3.84

Rejection and critical value at 0.05

DlWISION RULE

Determi~iation of Expected Frequeiicy E

I. Ej = 90 x 33 = 16.5 (ii) E j =90 x33 = 16.5 180 180

iii. E j = 9 0 x 147 =73.5 (iv) Ej = 90x 147 =73.5 180 180

Options

NO

No

Ycs

YCS

0.34 '

O j

15 - 18

75

72

E j 16.5

16.5

73.5

73.5

( 0 -E j)

-1.5

1.5

1.5

-1.5

(0 j -E j)

2.25

2.25

2.25

2.25

(0 -E 34 E j

0.14

0.14

0.03

0.03

1 0 1

Here, we accept that government taxation policies effect the use of leasc

c.11 Test of Qucstioiinairc 10

'I'ablc 4.10 is rcpruduccd I w c for the tcst.

Options

Increase in taxation results increase in

leasing

Increasc in taxation results reduction in

Icasing

Iicduction in taxation rcsults incrcasc in

Icasing

TOTAL

The degrec of freedom, V= (3- 1) (2- 1)

Dcternlinatiorl of Expected Frequency E

1. E j = 9 0 x 128 = 6 4 (ii) E 1 SO

. . . 111. E, = 90 x 12 = 6 (iv) E j =

180

Lcsscc Lcssor -----I----

v. Ej = 90 x 40 = 20 (vi) Ej = 9 0 x 4 0 = 2 0 180 180

Table 4.22 computation of XI2

incrcasc in leasing

1 Increase in taxation results 65

Incrcase in taxation results

incrcasc in Icasing

Incrcasc in taxation rcsults

reduction in leasing

63

G

Increasc i n taxation results

reduction in Icasing

increase in lcasing

G

Reduction in taxation results 19

incrcasc in lcasing

Rcduction in taxation rcsults

Herc, wc accept that increase in taxation results increase in leasing. This is

because = 0.13 12 < xo2 =3.84.

21

DECISION ON HYPOTHESIS THREE

'I'csl oil qi~cslion~iairc 0 rcvcals that truly govcrnmcnt taxation

polices effect the usc of leasc financing. Test on qucstionnairc 10 also

confirms that incrcasc in laxation rcsulls to incrcasc in lcasing. l'hc XI2 <

Xo2 in cach case of the tcst of questionnaire 9 and 10.

01ic ground of thcsc, wc tlicrcforc, acccpt thc null hypothesis, 1-10,

which statcs that tasation policy of on thc

corporatc lcasc financing policy.

4.5.3 TESTING 0 1 7 I-IYPOTIIESIS THREE USING COEFFICIENT

OF CORRELATION (r)

I-Iypotlicsis thrcc is further tcsted to confirm thc truth in the answer

to questionnaire 10. The tcst is conducted using the data collected from the

coinpanics as allowcd in answcr to question 5 oral interviews. This test is

to dctcrn~inc tllc relationship bctwcen Nigcria tax rate and lease financing

as to warrant significant effect as in the hypothesis thus: NULL

HYPOTHESIS Ho.

Taxation policy of govcrnn~cnt has significant effect on the

corporate lcase financing policy.

ALTERNATIVE HYPOTHESIS I.I1

Taxation policy of gover~~n~ent has no significant effect on the

coi-porntc lcasc financing policy.

Test Statistic . -

Rcfcr to 3.5 for f ~ l l dcfinition, howcvcr coefficient of co~~elation r

DECISION RULE

-1- 1 i'osilivc corrclalion

- 1 Negative correlation

o Zcro corrclalion

Computation of coefficieut of correlatioli (r)

Lct tax Rate bc a

Let lessee be c

Lct Icssor bc c

Tllc tax ratc cffcct on lcsscc and Icssor (Icase financing)

diffcrcntly.

Tax Rate Effect on Lessee

Year Tax Rate(a)

1992 40%

1993 35%

1994 35%

1095 35%

1996 35%

1997 30%

is tested

Calculation of 56 and ac

5 d ilc

Ci~lculat io~~ of 6,6,

a a- 5 (a- 5)"

40 7 49

3 0 -3 9 ' 157 -18 324 (a- a>2 fi (c- d )2 3498 ,

Decision: With r of + 0.82, tax rate could bc said to be positivcly

correlated to lease financing.

Tax Rate Effect on Lessors

Ycar tax ratc (a)

1992 40%

1993 35%

1994 35%

1995 35%

1996 35%

1997 3 0'!4

1998 30%

1999 30%

2000 30%

200 1 30%

Calculation of fi,e and ae

il

40%

3 5%

3 5%

35%

35%

30%

lessor (c)

254

2 10

202

205

199

196

172

1 84

173

165

Calc~llat ion of 6 3 ,

Decision: 'Thc valuc ol' I. bcing -1-0.92 confirrncd that tax ratc is positively

correlated with lease financing and in relation to Icssor. b

The tests conducted confirmed that tax rate is positively corrclatcd

with leasc financing. It shows that incrcasc in tax rate rcsults to incrcasc in

Icasing. This also confirrncd thc acccptancc of thc null hypothcsis 1-10,

which postulates that govcrnmcnt taxation policy has significant cffcct on

thc corporate leasc financing policy. The altcrnativc hypothcsis I-li, is

thcrcrorc, rcjcctcd.

CHAPTER FIVE

5.0 IJINDINGS, IWCOMMENDA'I'IONS AND CONCLUSION

5.1 SUlMMARY OF FINDINGS

A. POPULARITY: Lcasing as an alternative source of financc has

very early beginning but its application in the third economies especially

Nigeria is vcry rcccnt. Commercial activitics startcd increasing in prc-war

period and more especially after the oil boom in the early 1970s. This

ignitcd suddcn growth and development of the finance industry occasioned

by t 1 ~ introduction of tllc structoral ~ d j u ~ m c n t Progranunc (SAP)! The

illiquidity thrcat posed to crcditors by thc second ticr Foreign Exchangc

Markct (SFEM) introduced in thc mid 1980's And the high interest rates

faced by comnercial and other financial house borrowers, and the abysmal

dcvalu~tion of thc Nigerian currency (thc naira) gingered corporatc I

organizations into revisiting other forms of project financing hilllcrto

ignorcd. It is thcn that leasing started gaining more prominence among

companies.

This research find out there exists leasing and is applied as an

alternative instrument of debt financing. There is also awareness and

popularity of its application by companies.

B. DURATION (TERMS) OF LEASES: Basically, there arc two

typcs of lease: operating lease and fiua~~ce lease. Though thcre may be

some other parameters of distinguishing lease, the generally acccpted

distinguishing factors into types-especially in this research are lease period

or lcasc tcrrii and conl'crlncnt to t l~c cquipmcnt/assct user of all advantages

and risks of thc transaction. Authorities in Icasing rccognize as short-tcrnl

Icascs ranging lkom 1-3 ycars as operating lcasc, whilc long-tcrm lcasc (or

financc lease) should rangc from 3 years and above.

Sonic of thc intcrvicwccs cxplaincd that the reason for undcrtaking

short-tcrm (opcrating) lcasc is because of the increasing rate of inflation in

the country. They claimed that inflation threats do not allow them enter

into long-term (finance) lease contracts which always have annual ot two

to threc years contract renew agreement.

C. EASE AND CONVENIENCE OF ARRANGEMENT AND

EXECUTION: Lcssccs coilsidcr Icasing casicr and inorc convenicnt to

arrangc and csccutc while thc lcssor alternatively say that is Bank financial

house loan that is easier and more convenient to arrange and cxecute. The

tcst of l~ypotl~csis one confirmed that lcase financing is not more easier and

convenient to arrange and execute.

D. GOVERNMENT AND TAXATION POLICIES EFFECT ON

LEASE: Government taxation policies, Progran~mes and regulations affect

many busincsscs in a numbcr of ways and one of the businesses affected

' by govcrnnlcnt policics is Icasing. Tbc test of llypothesis in this regard

confirnls the opinion of respondents that actually government taxation

policies affect lease transactions.

E. CORPORATE CAPITAL STRUCTURE AND INTEFUST

IIATkS: This likc govcrnmcnt tasation policics cffect decision to lease.

Interest ratc prevailing in financial markets and the company's capital

structurc dctcrminc a decision to Icasc or not. Financial institutions and

cxpcits agree that as intcrcst ratcs risc in financial markcts, companics find

i t vcry diflicult to financc thcir projccts and in consecluencc look for

alternative forms of financing such as leasing asscts to finance the projects

or in extreme casc abandon the project. Where a company's capital

structure is mainly debt, it may be difficult to permit further borroaing

especially from the point of view of crcditors and the company may rcsort

to leasing.

F. FACTORS DETEIZMINING USE OF LEASE FINANCING:

Profitability and cash flow in relation to corporatc cost of capital arc thc

most vital fictors determining whcther to lcase an asset or not by

companics. Thc respondents and interviewees agree that companies are

always looking at what level of profit and cash flow which will accrue

from financing a particular project by using cither internal resources, or

borrowing or leasing. Choosing any, wcre all functions of the cconomy,

cspccially thc corporatc cost of capital and what their overall cash flow

will bc.

. . 6 113

G. EVALUATION OF LEASE TIWNSACTIONS: Many companies

linvc cs~ablishcd modcls for evaluating thcir lcasc financing transactions.

This cvaluation is to cnsurc that the cash flow target1 objective of the

company is met and hcncc cnablc thc conlpany to 'achievc hcr ovcrall

objective.

5.2 IUICOMMENDATIONS

A. AWARENESS AND POPULARITY: Although there is public

awareness anlong corporate organizations of the existence and bsc of i

icasing, therc arc still lots of work to be done in order to consolidate

the cxisting awareness. Seminars and programmes on leasing and

lcase financing should bc organized to spread hrther the awareness

to thosc organizations, whic11 do not 11avc full knowledge of i t and

also to consolidatc on the gains already achieved.

B. LEASE PERIOD: Majority of lcase transactions arc usually for

short -tern (operating lease) in Enugu State. This suggests that

much resources have not heed channeled to projects which have

longer periods, better and stronger econon~ic importance to both

operators and the cntirc economy. Consequently, the operators (the

playcrs) should bc cncouraged through govenlment policies and

programs to be more interestcd in financing long-term projecls of

high economic value so that government industrialization programs

mcl O L I I ~ I ' CCOIIOIII~C: ~ b j c ~ t i v c s can bc achicvcd with case.

C. ARRANGEMENT AND EXECUTlON OF LEASE: The

arrangcmcnt and cxccution of lcasc financing is strcssful and . therefore all those bottlenecks, administrative bureaucracy

prevailing in the lcssor companies should be expunged. The clauses

included in the base agreements should bc removed as they impingc

the economy, efficiency and effectiveness with which lease

financing is arrangcd and cxccuted. +

Although lcssor find i t casier and more convenient to arrange and

cxccutc banks1 financial housc loan, because of thc ncccssity for

thcin to continuc in busincss, thcy should ensurc that the asscts

acquired are lcascd out with minimum limitations and to incrcase

turnover rather than allowing the assets to waste away as unleased

stock.

D. GOVERNMENT POLICIES: Governinent fiscal and monetary

policies especially tax ratcs, capital allowances rates regulated or

deregulated intcrest ratc structure, deflationary monetary policy,

rcstrictive crcdit cxpansion, backward intcgration and others affect

leasc financing. Opcrators of the markct especially thc "Equipii~cnt

Lensing Association of Nigeria" (ELAN) and othcr large corporatc

lessces should always make representations as a group to

govci-nmcnt on ways to lower interest rate on loans so that

prospective .Icssor will find it worthwhile to leasc equipment and

othcr asscts instcad of laying out large cash to acquire an asset

without Icasing tllcm out to lcssces bccausc of high rcntal paynlcnt

which t l~c lcssccs could not afford.

E. INCENTIVES: Majority of what is leascd by companies are plants

and machincrics. Thcrc will bc industrial growth if inccntivcs are

offered to manufacturers and other users who are not able to

purchasc their own plant and machineries. Such iilccntives could be

to lcasc the assct at n v c ~ y minimal cost froin the lessor by the C

Icsscc. This could bc acliicved through gcnerous tax benefits and

high capital allowances to both lcssecs and lcssor. Lessor should

rcducc opcrating cost by conccntrating on those aspccts of thc

business which they have competitive specialisation with rcspcct to

the state of thc art, technologies, repairs and maintenance.

5.3 CONCLUSION

Duc to thc trcnd of national and international economic clinlatc and

thc astronon~ical risc in cost of acquisition, maintcnancc and rcpairs of

rcsourcc inputs, cspccially plant and machincrics, land, buildings and

others, corporate organizations and financial experts have developed and

perfccted the use of leasing as an alternative to obtaining credit from banks

and otl~cr financial institutions.

Lcasing could bc packagcd into short-tcrm or long-term to suit thc

peculiar naturc and cnvironmcnt of thc company. Although, Icasing sccms

to Iiavc dovclopcd i n Nigeria, i t is opcrating in a dcvcloping nation. On this

ground, tlmcro have been various sctbacks to thc cxtcnsivc application of

lcasing among corporate companics/firms. Lcasing as an altcrnativc form

of credit-financing, is yet to be completely comprehended by many and

those who comprehend and apply, it complain of unfavourable government

monctary and fiscal policies and constant changing of thcse policies. These

makc i t not too attractivc to prospcctive playcrs in the scctor. Somc fiscal

and monctary policies particularly those to leasing need to be reviewcd and

allowcd to opcratc for at lcast fivc ycars before another review.

Leasing possesses to a large extent advantagcs which endears it to

corporate users more than tlme traditional or conventional methods of

financing projects some of which are:

1 Leasing does not involve rigorous and time-consuming meetings and

collateral arrangements as in other conunercial bank loans,

1 Tlmc intcrcst clcmcnt in a lcasc contract, especially an opcrating

Icase, docs not vary with tlme rapidity of a bank or othcr conmmcrcial

loans intcrcst rates;

117

The terms of lease contract appear clearer and easily understood by

all partics; and, . ..! I

Tlic cliangc in cost can casily be negotiated and agreed to by both

parties to the lease contract.

Coinpanics, both lcssccs and lessor, usc their established projcct

acceptability modcl to cvaluatc all lcasc transactions bcforc undcrtaking

any in ordcr to mainti~in thcir objcctivc of ccrtain cash flow lcvcl and

profitability.

Finally, majority of the lcases in Enugu arc short-tcrm or oherating

lcascs, which mostly involve plants, macl~incries, land, buildings and

quto~i~obilcs with fcw long-tcrni (finance) leascs. Government should aim

towards changing this trend, through her fiscal and inonctary policics.

Thcsc 'policics should always rcflect conccrn on companies whosc

opcrations may bc jcopardiscd by such policics and as such grant lceway to

such con~panies to find suitable alternativc in lease financing through

favourable tax concessions and high capital allowances rates. This will in

no small measures help governmcnt in realize its $ethnological break- C 1 1 <f - 2{*&\

through drcam by the year 20 10. ..' ' r

5.4 SUGGESTIONS FOR FURTHER IWSEARCH.

This rcscarch and indccd enquiries into the corporate lcasing as a

strategy for improving corporate financial structure is a contii~uous one,

bccausc a qucstion resulting from sceptism on our part brings somc

rcscarcl~nblc pl-oblcms in fbcus. Morc so, cach or sonlc of thc rcscarch

questions can bc f~~rtl lcr diagnosed and furthcr analysis conducted so as to

consolidate thc leasing sector, which claim to be developed but cannot

bccausc it built on an economy that is developing.

~IULIOCIIAlDtlY

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Pandey I.M. (1999), Financial Management, Ncw-Dell~i, Vikas Publishing

Housc PVT Ltd. 8"' Ed.

Samuels, J.M.; Wilkes, F.M. & Braysbaw R.E. (1997).

Management of Company Finance, USA, International

Thompson Business Press 61h Ed.

Spicgcl M.R. (19G4), Thcorv and Problems of Statistics, Singapore, Kin-

Keeng Printing Co PTE Ltd.

2. STANDARDS

l~~tcrniltionnl Accoir~lting Standards (IAS 17) (1994)

"Accounting for LCI~SCS", International Accounting Standards

Conlmi ttcc. \

Statcmcnt of Accounting Standards (SAS 19) (19YG)

accounti in^ for Lcasc", Nigerian Accounting Standards

Board.

Financial Accounting Standards Board (1976) "Accountinn for Lcascs"

Financial Accounting No 13, Standards Conn. #

3. JOURNALS

Ani, M. (1995), Thc 1-lonousablc Ministcr of Finance the 1995 Budget

Brcak Down, Daily Timcs vol 1. No 3 Januaiy.

. Egbuna, E.N. (1995), "Equipment Leasing in Nigeria Trends and

Prospects," Bullion. Publication of CBN, vol. 19 No.3

JulyISeptember.

Nelson, T.A. (1994), "The Impact of lease on Financial Analysis,"-

Bureau of Business and Economic Research, East Lansing

Mich, Graduatc School of Business Administration.

APPENDIX 1

QUESTONNAIRE LETTER

Department of Accountancy University of Nigcria, Enugu Canlpus. 10"' February, 2003.

Dcar rcspondcnts,

LEASING AS A STMTEGY FOR IMPROVING FINANCIAL

STRUCTURE IN YOUR COMPANY

I am a Post- Graduate student of University of Nigeria Enugu Campus, #

carrying out a research project on the above topic.

This project is in partial fulfilment for the award of Master of Business

Administration (MBA) Dcgrec in Accountancy, could you please assist by

cohpleting the attachcd questionnairc.

Any data and/or infornlation given will be used strictly for academic

purposes and be treated confidentially

Thanks for your anticipated co-operation

Yours Faithfully,

Onyefulu Edmund I. PG/kIBA/O0/30984

Appendix 2 questioiinaire

I'EIISONAL DATA OF lS1'ONI)KNTS (OPTIONAI,)

NAIME: AGE:

OFFICIAL DESTGANTION: SEX:

EDUCATIONAL QUALIFICATION:

LENGTH 0 1 ; SERVICE:

NOTE: Pleuse you ure required fo tick ( ) in fire box corrc?~yottdittg fo

1. Is Icasing as an alternative instrument of financing a project kndwn

to your company?

(a) Yes

2. How frequently do your Company apply lcasing to finance somc of

a) Vcry frequently (b) Frequently

3. Which of thc listed methods of financing does your company

considcr easier and more convenient to airange and execute?

a) Lcasc financing 17 (b) Hire-purchase financing n c) Bank/ Pitlancial Housc loan I I

4. On thc averagc how long docs lease financing last in your company

a) Bclow and 5 ycars [7

b) Above 5 years and below 10 years I I

5. Lcasc financing has bccomc vcry popular in conipa~iics bccausc of

thc cnorn~ous problclns of applying otllcr financing methods.

a) True n (b) False

6. Docs n dccision to lcasc an asset depcnd on the corporate cost of

capital?

(a) Yes 11 (b) NO r 7 7.. The provision of solution to corporate cash flow problems without

significant conscqucnccs by leasing inakcs i t popular among

companies.

(b) False f 7

8. Therc arc two typcs of Icasc-operating and finance leases. Which of

thc two do your coliipany prcfer?

(a) Operating leascs

(b) Finance leases n 9. Do government taxation policies affect the use of lease financing?

10. In which direction would you assess the effect of government

taxation policies to lease financing policy of your company?

a) Increase in taxation results increase in leasing I I b) Increase in taxation results reduction in leasing El

c) Reduction in taxation results increase in leasing 0 1 1 . Do your ccmpuny h a w r ln cstnblislicd systcm or ~iiodcl for

evaluating tlic profitability andlor cash flow in~plications of Icasc

transactions? \

12. Fitiancc lcasc and operating lcasc involvc lcasc contract costs and

other costs. Which of them is more costly than the other? n - a) Finance lease

b) Operating lease

c) No cost Di fik~.cncc 0 13. How would you assess the duties of trustees as regards to lease in

a) Vcry effective 0 b) Effective n c) Not effective

4. How would you assess the development of leasing in Nigeria?

a) Under developed

b) Developed n c) Developing 0

APPENDIX 3 ORAL INTERVIEW

1. How would you rclatc lcasc d ~ ~ c l ~ p l ~ ~ e l ~ t to t11c development' of <

Nigeria? 4

2. In answering tlie questionnaire, you stated that a"decision to lease an

assct dcpcnd on tlic corporatc cost of capital. Why?

3. Qualitative factors arc often ignored when evaluating leases. How

arc these considercd, and by who?

4. There are two types of lease, which type do you prefer and why?

5 . Sincc this report is purely for academic purposes and fdr the

companies under study, please, could you allow us collect some data

regarding the trend of both finance and operating leases in your

company duc to government tax rate changes or variations.

6 . Is tlicrc any advantage(s) in leasing than the outright purchase?