INTERMEDIATE ACCOUNTING 2 PAPER Why Leasing Becomes More and More Preferable for A Company in Indonesia? I. Preface Being in a very high competitive business condition, a company has to be well prepared for every potential business problem. One of the problems is for a company which will do such a business expansion, they need to spend huge amount of money to make some new investments. For instance, they need to have new capital assets to run their new business. Due to the huge amount of money they have to spend, the company usually does not provide a bundle of cash from their own pocket to get those kinds of new capital assets.
To provide the new capital assets needed, the company has some alternative solutions they can choose. Those are 1. Buying on the company’s own money pocket 2. Buying on bank or other financial institutions loan 3. Leasing Buying on the company’s own money pocket sometimes raise a new problem, the inadequate amount of money. If they decide to buy on bank or other financial institutions loan, they have to fulfill a lot of complicated requirements to make a debt and they are restricted to only a certain number of money, which is popularly known as 3L (Legal, Limit, and Lending).
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That’s why, more and more companies now decide to do a leasing as their alternative to get new capital assets. However, a new problem has risen from doing a lease regarding the termination or the cancellation of the approved agreement. There are three reasons of occuring the termination 1. Force major It is the cancellation of leasing transaction, for example due to a fire or natural disaster. 2. Default It is the cancellation of leasing transaction because the lessee is not able to pay the lease payment and other leasing liability so that finance lease contract is over prior the inception date. 3.
Economic reason It means the lessee ends the lease period up before the inception date due to economic consideration by paying all remaining liabilities. Due to the complexity of leasing problems, this paper will only discuss about why leasing becomes more preferable for a company in recent years, especially in Indonesia. II. Content Leasing (Sewa Guna Usaha in Indonesia term) is a contract agreement between lessor and lessee. The agreement states that the lessee has a right to use the leased asset, then as the compensation, the lessee pays a certain fixed amount of cash for every period to the lessor.
Generally, leasing can be categorized into two groups, operating lease and finance lease. Operating lease is a common leasing type used by most companies and usually has a short time period. Lessee has a right to use the asset for a certain period of time and in the inception date, lessee can have an option to purchase that asset. The benefit is that by leasing, lessee can acquire that asset without buying in full purchase price. Here are the characteristics of operating lease 1. Leasing company as the owner of the asset . Lessee periodically pays a lump sum of money but not all the carrying cost of the asset 3. Leasing company takes the economic responsibility and the leased asset maintenance 4. Lessee must give the leased asset back to lessor in the inception date 5. Lessee can cancel leasing contract before the agreement period ends up 6. The lease term is usually less than the economic useful life of the leased asset Capital lease can be divided into two categories, direct financial lease and sale and lease back.
Direct financial lease is leasing type that allows lessee to state the specification, price and the leased asset supplier in purpose of acquiring the asset according what is only needed. On the other hand, Sale and lease back is leasing type in which the company has an asset and then, the asset is sold to lessor, then lessor and lessee make a leasing agreement contract over that asset. Here are some finance lease characteristics 1. Lessee as the owner of the leased asset 2. Lessee is liable to pay a certain amount that stated in the agreement periodically to lessor for a certain period.
Lease payment consists of rental payment and other costs 3. Over the contract period, the agreement can not be cancelled by only one party (noncancellable) 4. Lessee has an option to purchase the leased asset according to the agreed residual value in the inception date 5. Economic risk and maintenance cost are responsibility of lessee 6. Lessor expects to obtain all of the carrying cost of the leased asset back, including the other costs (interest, tax, insurance, maintenance cost, etc) The advantages and disadvantages of leasing as an alternative of capital source are as follow The advantages: . Full financing : leasing transaction is usually done without any down payment and the financing can be given up to 100% 2. More flexible : leasing is said to be flexible compared to banking loan because the rental payment can be arranged and matched to lessee ability 3. Off balance sheet : activa that is included into leasing category is not listed in the company asset 4. Consideration of technology advance : the company is avoided from the loss due to the fast growth of technology 5. Incerase Debt Capacity The disadvantages: 1. Force major
It is the cancellation of leasing transaction, for example due to a fire or natural disaster. 2. Default It is the cancellation of leasing transaction because the lessee is not able to pay the lease payment and other leasing liability so that finance lease contract is over prior the inception date. 3. Economic reason It means the lessee ends the lease period up before the inception date due to economic consideration by paying all remaining liabilities. Leasing is one alternative solution for important middle-term capital source in Indonesia, considering the growth of multifinance companies.
In Indonesia, leasing company which is a kind of multifinance companies has grown to a large number of. Until Mei 1997, the listed leasing company is approximately up to 235 companies with total financing of US$ 2. 71 billion and this amount is big enough compared to the other Asian countries. Source : Bisnis Indonesia, 26 Mei 1997 From the table above, we can conclude that Indonesia was in the fourth position based on the total financing. Leasing can help the company to maximize the use of asset and its financing.
One of the benefits of leasing rather than making a loan is lessor has better position than creditor when lessee has any difficulty in financing. If lessee were not able to fulfill their liability in leasing contract, lessor had a right to take the leased asset back because the title still belonged to lessor. In another way, a creditor, even a creditor with fixed guarantee, would suffer a delay and had to spend other costs if he wanted to get the asset which is directly or indirectly financed. From the cost model, leasing as a capital source is profitable enough.
Interest rate of leasing in normal condition is ranged 15%-17%. This interest rate is competitive enough compared to bank loan interest rate which is ranged 18%-22%. This is because in doing the business, lessor doe not need teller, customer service, clearing staff, and high costly building. III. Conclussion To provide the new capital assets needed, the company has some alternative solutions they can choose. Those are 1. Buying on the company’s own money pocket 2. Buying on bank or other financial institutions loan 3. Leasing
However, among those alternatives, leasing is being considered as most ideal capital financing source for the company to expand their business operation, either from competitive aspect or the needs of capital asset investment. IV. References http://webcache. googleusercontent. com/search? q=cache%3AzSFNWMEuN00J%3Awarsono. staff. umm. ac. id%2Ffiles%2F2010%2F02%2FSewa-Guna-Usaha-Sebagai-Alternatif-Sumber-Dana-Warsono. pdf+sewa+guna+usaha+sebagai+alternatif+sumber+dana&hl=id&gl=id http://www. docstoc. com/docs/516549/LEASING-SEBAGAI-SALAH-SATU-ALTERNATIF-PENYEDIAAN-MODAL-BAGI-PERUSAHAAN