 Hello and welcome to the session in which we would look at introduction to accounting for leases. So in this session we need to understand what is a lease? Who's the less sore? Who's the less C? Who are the players in the industry? Basically, we're setting the ground to discuss a little bit more about how to account for leases in future sessions. So what is a lease? Simply put, a lease is a contract. It's a contract between two parties between a less sore who's the owner of the property and a less C, a renter. Think about if you want to rent a place to live. You're gonna have to talk to an owner. The owner of the property is the less sore. You are, if you are trying to rent, you are the less C, you are the renter. And what would the lease agreement gives you? It gives you the right if you are the renter to use the property to live there. Can you live there forever? If you are a renter, not really. You live there for a specified period of time. I mean, you can if you would like to, but that's not how it works. And the property will be owned by the less sore. So it gives you the right to use the property. Now in the business world, in the real world, who leases? Well, practically most companies are on either side, a less sore or a less C. For example, information technology companies like IBM, they lease their equipment, they lease their software. And you have another, so they are the less sore. Then on the other hand, you have a business that uses their assets, that uses their equipment, that uses their software, they are the less C. Transportation companies, for example, they lease trucks, airline companies, they lease their aircraft. For example, a company like Delta, Delta Airlines, what they do is they lease their aircraft. So Delta Airline is a less C. Then you have Boeing. Boeing leases the aircraft to Delta Airlines. Boeing is the less sore. Same concept when you buy a car, sometimes it's financed by Ford, Ford Motor Company. Ford is the less sore and the customer is the less C. If you are buying a car via a lease, same thing with GM, construction company, agricultural company. Basically, all companies, they're either a less sore or a less C. So who are the players? Who financed these transactions? There are mainly three parties that finance the business of leases. The first, obviously, are the banks and the banks basically control the majority of the of the leases. And that makes sense because that's the bank are in the business of financing transaction. Think of a loan, banks like Wells Fargo, Bank of America, Citigroup, so on and so forth. That's the first party banks and usually they're the largest party because that's what they do. The second party are independent financiers. Simply put, private companies are in the business of financing transactions like International Lease Finance Corp. That's the second group, the second player. The third player are captive leasing companies. Who are those captive leasing companies? For example, Ford Motor Company, they sell cars. That's one company. They manufacture and they sell cars. And what Ford Motor Company would do, they will create Ford Motor Credits. Another leasing company, basically separate from Ford Motor Company. And that company, their job is to finance the transaction for customers. What does that mean? It means if you want to buy a car from Ford Motors, rather than going to the bank, Ford Motor Credits will have their own leasing operation and they would lend you the money. Those are called captive leasing company. Ford will have them, GM will have them, Caterpillar will have them, GE used to have them. And that's specifically one division of GE, which is GE Financial. I believe they sold it, it almost brought down all of GE Company, basically General Electric Company down in 2007, 2008, because that division financed so much subprime mortgages. So they financed so many transactions for homes with lousy credit, which in turn that division alone could have brought down the whole GE. What are the advantages of leasing? Now, I'm just going to make a personal note, when it comes to leasing, especially cars, I don't believe in leasing, like I don't believe leasing a vehicle. Maybe you want to lease something for business, that's a different story, but I don't believe in leasing. Actually, I don't believe in that. I believe you should not overextend yourself in that. But nevertheless, we have to learn about what are the advantages of leasing from LSE's perspective, from the renter, also from the lessor, from the owner's perspective. So why do businesses go into leasing? Before we discuss advantages and disadvantages of leasing, I would like to remind you whether you are a student or a CPA candidate to take a look at my website, farhatlectures.com. I provide you lectures, multiple choice, true, false exercises that's going to help you do better in your accounting courses, as well as your CPA exam. Invest in yourself. Don't change yourself. I don't replace your accounting course. I don't replace your CPA review course. If you are listening, it means you are looking for some help. This is how you end up here. So go a step further. Subscribe to farhatlectures.com. So I'm going to start from the lessor's perspective. What are the advantages of leasing from a renter's perspective? Well, one thing is financing option. What does that mean? It means you cannot afford to buy what you would do. You would say, OK, if I cannot buy, I can finance it. So somehow I can use the property and I don't have to commit a large amount of money and I can afford the payment. And this is what usually people lease cars. But again, I'm against that idea. Now, usually also the lease is a fixed rate. Sometimes it's it's variable, which is risky. It means it could go up or it could go down, but you want a fixed rate. The second advantage is minimal risk of obsolescence. What does that mean? It means when you rent this property, let's assume you are renting. You are leasing computer system. What happened is this? You don't own it. So let's assume you leased a computer system and somehow there's a newer, better computer system. What you can do, you can upgrade your lease get rid of the old computer system and lease the new one. So there is a minimal risk of obsolescence. If you buy it, it's really yours. If you lease it, there's always some sort of an upgrade, upgrade option. OK, so you can upgrade in case of change in technology. It gives you that flexibility. So because you have that option, leases will give you the flexibility in acquiring your asset, which is good. Again, those are advantages. Also affordability. Again, it gives you finance option. And usually it's more affordable than buying. It's less costly. Oftentimes less costly upfront, less costly than buying at the current time. Maybe in the long run, leases may not be as cost effective as buying. But for now, we need to get going. We need to buy the asset. We need to run our business. And your only option is to lease. And this is what happens oftentimes with people. They lease. They don't buy because the leasing option is cheaper. But in the long run, it could be more expensive. But for now, we need to get going. Those are some of the advantages for the renter, for the Lassi. For the Lassour, the owner of the company, the business that's leasing the property. Well, for one thing, it's going to give them additional source of revenue. For example, Ford Motor Company, they manufacture cars. They sell them. They make a profit. That's fine. Then they finance the transaction. That's a separate business. So they're in two businesses. They manufacture the vehicles. That's one business. And they sell it for a profit, too. They finance the transactions. It gives them interest income. Well, it also helps stimulate sales. It helps increase sales. Why? When customers, when customers have options to buy the car using a lease, they are more likely to buy. Maybe they don't qualify at the bank to get a loan. Maybe they don't have enough down payment or the cash to buy the cars. You finance the transaction for them. You increase your sales, but also with increasing sales, using leases, using credit. Also, the business is taking a risk. Nevertheless, that's an advantage for the Lassour. Three, it gives benefits. It gives various tax benefit for various parties. For the Lassi, it's tax deductible. For the Lassour, it gives them some tax benefit as well. So there's some tax benefit. And we're not going to tax benefit because this is not a tax course. Just know there's tax benefit to leasing. The Lassour may also get the residual value from the property. It means after you lease the property and specifically for vehicles, what happened is this? The Ford Motor Company sells a car, lease it. Lease it after five years or after three years. The car comes back to the company. And it has to be back with minimal conditions. Specified conditions. What happened is they can resell the car again. So there is a residual value that they can get that the owner, that the renter did not get because they're getting back the residual value. So oftentimes, the Lassour will get also the residual value. Company classified leases as either a finance lease or as an operating lease. And now we're going to get into the accounting aspect of it. Now this is technical terms. What is a finance lease? What is an operating lease? So it's very important to understand, what is an operating lease? What is a financing lease? Because from an accounting perspective, from a journal entry perspective, it makes a difference whether the lease is a finance lease or the lease is an operating lease. So in the next session, we're gonna have to discuss when is a lease as a capital lease or a finance lease? When is it an operating lease? At the end of this recording, I'm gonna invite you again. What should you do now? Go to farhatlectures.com. Subscribe, work multiple choice through false. That's gonna help you reinforce the concepts, which in turn will help you do better in your classes on your CPA exam. Good luck, study hard, and of course, stay safe.