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GLOSSARY

Leasing terms, explained.

Plain definitions of the terms you will meet when you lease equipment, from capex to residual value.

A

B

C

D

E

F

G

H

I

J

K

L

M

N

O

P

Q

R

S

T

U

V

W

X

Y

Z

A

1 term

Asset-light modelA way of running a business that uses equipment without owning most of it, so less capital is tied up in fixed assets.

B

1 term

Balance sheetA statement of what a company owns, what it owes and the owners' equity at a point in time.

C

2 terms

CapexCapital expenditure: money spent to buy or upgrade long-term assets such as machinery, vehicles or fit-outs.

Credit assessmentThe review of a business's financials and track record that a lessor or lender carries out before approving a facility.

D

2 terms

Debt-to-equity ratioTotal debt divided by shareholders' equity. It shows how much of a business is funded by borrowing.

DepreciationSpreading an asset's cost over its useful life, recorded as an expense in the profit and loss statement.

E

2 terms

End-of-term optionsThe choices at the end of a lease: return the asset, re-rent it or buy it, as set out in the agreement.

End-use restrictionA condition in a loan that limits what the borrowed money can be used for.

F

1 term

Finance leaseA lease that transfers substantially all the risks and rewards of owning an asset to the lessee.

I

2 terms

Ind AS 116The Indian accounting standard for leases. Lessees recognise most leases on the balance sheet.

IRRInternal rate of return: the discount rate at which the net present value of all cash flows is zero.

L

4 terms

Lease rentalThe fixed payment a lessee makes, usually monthly, for using a leased asset.

Lease tenureThe length of a lease, agreed at the start.

LesseeThe business that uses the asset and pays rentals under a lease.

LessorThe company that owns the asset and leases it to the lessee.

M

1 term

Master rental agreementThe main contract between lessor and lessee. Each asset is then added through a rental schedule.

O

1 term

OpexOperating expenditure: the day-to-day costs of running a business, such as salaries, rent and lease rentals.

R

5 terms

Rental scheduleA document under the master rental agreement that lists an asset, its rentals and the lease tenure.

Residual valueThe expected value of an asset at the end of the lease term.

Return on capital employedROCE: operating profit divided by the capital a business uses.

Return on equityROE: net profit divided by shareholders' equity.

Right-of-use assetUnder Ind AS 116, the asset a lessee records for its right to use a leased item over the lease term.

W

2 terms

WACCWeighted average cost of capital: the average rate a company pays on its debt and equity combined.

Working capitalCurrent assets minus current liabilities: the funds available for day-to-day operations.

Definitions are general and simplified. Accounting and tax treatment depends on your reporting framework; confirm with your auditor.

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