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Considering an operating lease?
Lease machinery, equipment and fit-outs from ₹25 lakh to ₹100 crore.
Check eligibilityWhat end-of-term options are
Most equipment leases give the lessee a set of choices for the end of the term. The usual options are these four.
1
Return: hand the asset back in the condition the agreement requires, allowing for fair wear and tear.
2
Re-rent: extend the lease on the same asset, often at a lower rental because much of its cost has been recovered.
3
Buy: purchase the asset, usually at fair market value or at a price fixed by a method agreed in the contract.
4
Upgrade: return the asset and lease a newer model under a fresh rental schedule.
The options are decided when the lease is signed, not when it ends. How they are written also affects how the lease is classified for accounting.
When each option fits
The right choice depends on how much life the asset has left and whether you still need it in its current form.
WHAT CHANGES
Return or upgrade
Re-rent or buy
Asset's remaining life
Short, or outdated technology
Long, and still fit for purpose
Business need
Capacity or process is changing
Same output expected for years
Typical assets
IT, medical imaging, vehicles
Plant, racking, fit-outs
Cash impact
No end-of-term outlay
Rentals or purchase price
How it works in a lease
The agreement sets a notice period before the end date in which you tell the lessor your choice. If you return the asset, it is inspected against the return conditions. If you buy, the price follows the method agreed at the start.
Plan before the notice date.
Missing the notice window can roll the lease on, sometimes month to month. Diarise it and review the asset's condition and your need well ahead.
Accounting effect.
A purchase price fixed well below expected value can make a lease a finance lease. Under Ind AS 116, options you are reasonably certain to use go into the lease liability.
How options affect classification is a judgement. Confirm with your auditor before signing.
Where it shows up
A forklift fleet at the end of its lease
ILLUSTRATIVE
A warehousing company leased 40 forklifts for four years. Six months before the end date it reviews the fleet. Fifteen units have heavy hours and rising repair bills, so it returns them and leases newer models under a new rental schedule. Twenty are in good order and still needed, so it re-rents them for two more years. Five are used at a site it plans to run for many years, so it buys them at the fair market value set by the method in the agreement. Each choice is matched to how long it needs the asset.