Leasing is an alternative source of finance
in Nigeria, the importance of leasing in capital investment in the world over
cannot be over emphasized, but is yet to take a firm root in Nigeria, this is
because, this is because the syndrome of owning everything is still in vogue in
the country, the credit evasive is still very high in Nigeria, this singular
reason account t for the low patronage of leasing as an alternative source of
finance in the country, leasing has many definitions, but the legal definition
as given by the statement of accountancy
no ii. Says “leasing is a contractual agreement between owner (lessor) and
another party the (lessee)” which conveys to the lessor, the right to use the
leased asset for a consideration, usually a periodic charge called
As it can be seen from the above, the
concept of leasing envisaged the
separation of ownership from the economic use of an asset , this is a
fundamental characteristics of leasing, all other features flows from the basic
level, this form of credit level
is totally different from other
forms of finance because it only involve an exchange of asset for a periodic
rental, since this form of credit is evolving, there is the need therefore for
a standard evaluation and accounting system on the subject, this appreciation
of leasing came to limelight in Nigeria
in the early 80s, this was made possible because of the austerity measure
introduced by the democratic administration of Sheu Shagari and the subsequent introduction of structural
adjustment (SAP) in Nigeria being a
Mono-cultured economy that depended wholly on crude oil for her revenue and the continuous fall of crude oil price in
the international market, because of
this, it then became imperative for business to source their capital investment
and needs elsewhere.
The uncertainty which paraded the economy
made it difficult for financial institutions to go into medium and long term
credit financing. Hence, the appreciation of leasing by both lessor and the
lessee, there are however two main
categories of leasing:
leasing:- this is where the lessor while giving the lessees
the use of basic properties retains practically all the risk, obligations and
reward of ownership.
capital lease: - this is where the lessor transfers the risk of
ownership and reward to the lessee who is obligated to pay such cost as
insurance maintenance, and similar charges on the property.
OF FINANCE LEASE (SASII)
lease is not concealable.
assumes most of the risk and reward of ownership.
lease term covers substantially (80% or more) of the useful life of the asset.
lessee is responsible for repairs, maintenance and insurance of the assets.
lessor has the right of repossession when certain speculated contract
conditions are breached.
1.2 STATEMENT OF THE PROBLEM
As it can be seen from the background of
the study Hence, on accounting for lease, there are numerous problems of which
Cost of capital :-
the cost of capital is difficult to determine because it depend on the capital
structure of the lessor, if the cost of capital is high, then the rental may be
prohibitive and vice – versa.
Taxation: - the position of the lesser will impact significantly on the rental and
the frequent charge may be an advantage to the lesser.
Accounting treatment: -
at times, the lease are not treated according to the classification i.e.
operating lease being treated as a financial lease.
1.3 RESEARCH QUESTION
The primary purpose of this work entitled
accounting system in the leasing industry, therefore, is to evaluate the
adequacy of the treatment adopted by various leasing industries in the
treatment of their accounting entries and in formation and how they merge accounting theory with
practice as profit making organization.
The examination will indicate whether
there is a slight variance in the accounting system adopted in reporting
1.4 SIGNIFICANCE OF THE STUDY
The significance of this research project
is to enable one to appreciate the proper treatment of the various lease
transaction in the financial record of leasing companies, the maintenance of proper
accounting of financial records tends to improve the leasing service generally.
In all business endeavors, cost and time
are of paramount importance, and has to be controlled at all time, the
accounting system adopted will go a long way in controlling these items.
Finally, this work will ensure that the
information provided by leasing companies in their financial statement can be
evaluated and compared with other companies in the industry.
1.5 SCOPE OF THE STUDY
We do not intend to cover all the
accounting system in leasing transactions business, our work is confined to
accounting system in the leasing industry only, the scope of this work do not
cover the following areas.
Leasing agreement pertaining to exploitation or
exploration of mineral resources such as Oil, gas, minerals and timber.
Leases in favor of contractor financing the
development of landed properties.
Lease agreement relating to licensing of
intellectual properties such as motion, pictures, video recordings, manuscripts,
patients and copyrights.
As we all now that no human effort to achieve a set of goals goes
without difficulties, certain constraints were encountered in the course of
carrying out this project and they are as follows:-
Difficulty in collection of data: -
this is due to the skeptic nature of human beings most especially those in
competitive business towards the release of needed information; this may be
caused by the constant fear of not willing to release trade secrets.
Difficulty in identifying the contribution of
leasing income in the financial statement of most companies engaged in leasing
as an opportunity to take advantage of tax incentives.
Prudential guide lines: - another limitation is
that imposed by the central bank of Nigeria monetary and fiscal policy
from year to year, popularly known as prudential guidelines.
1.7 RESEARCH QUESTIONS
research study is designed to answer the following questions, after the
completion of the study, the questions are:
Does an assessment of accounting provide a
framework for decision making in the leasing industry.
Does assessment of accounting system has impact
in the industry.
Does an assessment of accounting leads to
attainment of organizational goals in the industry.
Does it impact on the overall objective of the
Does it have impact on the profitability ratio
of the industry?
1.8 PLAN OF THE STUDY
This section will contain the brief
content of each chapter, chapter one will have the background of the study,
statement of the research problem, purpose of the study, significance of the
study, scope and limitations of the study research question, plan of the study,
and the definition of various s terms.
Chapter two will treat the literature
review of leasing business, meaning of leasing, genesis of leasing, and an
evaluation of income recognition.
While chapter three will discuss the research
method, research approach to the work, sources of information, reliability of
data, sample , scope , time and finance.
Moreso, chapter four will discuss the
analysis of data, presentation of data, profile of the respondents, work
duration, other findings, research findings and testing of hypothesis,
Finally, chapter five will discuss
summary, recommendations, conclusion and bibliography.
1.9 DEFINITION OF TERMS
Lease: - it is a contractual agreement between the owners
(lessor) which conveys to the lessee to use the asset leased for an agreed
period of time in return for a consideration usually periodic payment called
Operating lease:- this is one in which the lessor while giving the
lessee the use of the leased asset or property returns practically all the risk
of obligation and reward of ownership.
Finance or capital lease: - this is one in which ownership risk and reward
are transferred to the lessee who is obliged to pay such loss as insurance,
maintenance and similar charges on the asset, usually, the agreement is not
Leverage lease:- this is a
three party lease involving a lender and often a financial institution in
addition to the usual lessor and lessee, the lender supplies in most cases the
greater part of the purchased price of the leased asset.
sales type lease: - this is one where the dealer, (lessor)
transfers substantially all the risks of ownership and benefit of the property
to the lessee and at the inception of the lessee, the fair value of the leased
property is greater or less than the carrying amount in the book of the lessor
, resulting in a profit or loss to the lessee who is often a manufacturer or a
direct finance lease: - this is
slightly different from the sales – type , the fair value of the leased asset
is the same as its carrying amount to the lessor.
Sales and lease back: - it is the one in which the seller of the
property leases it back from the buyer.
Bargain purchase option: - it is a provision in the leased agreement,
granting the lessee the option to purchase the leased property for a minimal
sum considered lower than the lucky prevailing fair value of the property at
the time the option is exercisable.
Fair value :- it is the
amount that can be realized upon the sale of the property in a free market and
in an arms length transaction between knowledgeable parties.
Inception of lease :- it is the date that both parties agreed and
make definite commitment to the principal lease agreement.
Initial direct lease cost: - the lessor who is
directly attributable to the particular lease agreement incures the cost, the
cost includes legal fees, documentation cost, stamp duty and commission.
Residual value of lease:- it is the estimated fair value of the leased
asset at the end of the lease term.
Useful life of an asset:- the short of (A) at the pre- determined
physical life and (B) the economic life during which it could be profitably
employed in the operation of the enterprise.
Unguaranteed residual value:- it is the portion of the
residual value of the leased asset that is not guaranteed by the lessee or
guaranteed only by the third party related to the lessor.
Lease term:- it is the duration of the lease which may
vary from few months to the entire life of the asset.
Contingent rentals :- these are increase or decrease in lease
payment made by lessee as a result of changes occurring after the inception of