Conceptually, a lease may be defined as a contractual arrangement in which a party owning an asset (lessor) provides the asset and the right to use the equipment to the user (lessee) over an agreed period of time for consideration in the form of periodic payment (rentals) with or without a further payment (premium).
At the end of the period of contract (lease period), the assets revert back to the lessor unless there is a provision for the renewal of the contract. Leasing essentially involves the divorce of ownership from the economic use of an asset. It is a contract in which a specific asset required by the lessee is purchased by the lessor, in this case from a manufacturer selected by the lessee.
Leasing is a device of financing. The position of a lessee is akin to that of a person who owns the same asset with borrowed money. The real function of a lessor is not the renting of assets but lending of funds. Lease financing is, in effect, a contract of lending money.
The lessor is the nominal owner of the asset as the possession and economic use of the asset vests in the lessee. The lessee is free to choose the asset according to his requirements and the lessor does not take recourse to the asset as long as the rentals are regularly paid to him. An asset lease transaction can differ on the basis of the extent to which the risks and rewards of ownership are transferred and the number of parties to the transactions. Risk with reference to leasing refers to the possibility of loss arising on account of underutilization of the asset.