Page II of I

These days, leasing is usually understood as a modern form of financing of various assets, both in the commercial and the private sector. Leases have now become an integral part of economic life. With their multiple creative possibilities and variations, leases are an equitable alternative to buying and

The diversity of different forms of leasing, and the fact that there is no uniform lease contract as a reference, results in lease accounting being one of the most difficult areas of accounting under almost all jurisdictions. ^[1] This diversity leads to an accounting system for leasing business with different possibilities to allocate positions in the P & L and balance sheet. Due to the lack of specific rules, leasing accounting is mostly based on general accounting principles. ^[2] In Germany, relevant tax decrees have impact on the local accounting. Leases are, in principle, not fixed on legal contract types, and this allows temporary grant of use and utilization of liquidity-friendly financing alternatives in the balance-sheet. Since most major accounting systems presuppose exclusion of pending transactions from the balance sheet, ^[3] companies used contracts for grant of use, such as lease, deliberately to influence the accounting. For example, sale and leaseback transactions are used to reduce the balance-sheet debt, though the physical property mapping has not changed. [4]

The current lease accounting under IFRS 17 of the IASB is to be understood as a reaction to the existing situation in the various accounting systems. The aim of the standard setter was to capture the major part of the grant of use in the balance sheet. All postings, which change the asset allocation similar to an investment, should also be accounted as such. ^[5] The concept of economic ownership divides any grant of use in leasing into two classes. The finance leases which, simply put, means all long-term and investment-like grants of use, and operating leases, which are any other grants of use. This was still not sufficient for the standard setters, in particular against the backdrop of the various forms of expenses, and due to growing discussions at national and international levels about renewal of

Page 2 of 16

sector should be accounted for. Chaired by Warren McGregor, the IASB issued a joint project with the U.S. Federal Accounting Standards Board (FASB), and since 2006, the lease accounting is on the agenda as an active reform project. Basis for reform efforts was the so-called McGregor paper of 1996. [6]

Given the increasing importance of leasing in the economic structure and the different treatment in accounting systems, the goal of this work is to present the historical development and show the differences of leasing referring to the distinction by asset types and as well by distinction between operate and finance lease ending by a conclusion to the economical significance of leasing.

The term “leasing” refers to the grant of use of an asset or value by a lessor to a lessee. Often, the lessor acquires an asset already with the intention to pass it on to a lessee. During the contract period, the lessor remains the legal owner of the asset; the lessee is legally only the possessor. In return for the grant of use, the lessee makes regular installments. In addition to the agreement of installments and the grant of use, the lease often includes contract purchase options for the lessee, and lessor-based rights upon service and maintenance. The lease itself is not a legal contract, such as the purchase agreement fixed in the German Civil Code (BGB). Due to the diverse interests of the different partners in leasing, in German law an unambiguous assignment of the lease to a statutory contract types is not possible. [7]

The conventional lease can be divided into two main groups, the finance lease and operating lease. The distinction is found in the form of the lease contracts, from economic and financial points of view, as already stated, between traditional

Page 3 of 16

Though leasing today is sufficiently understood as a modern form of financing, the time-limited grant of use against payment is not a phenomenon of our time. Already over 5,000 years ago, there were similar conditions to rental agreements, which represent early forms of leasing. ^[8] The first legal regulations probably go back to the Babylonians in about 1700 BC, governing the risk between owners and users on rented oxen. At that time, it was the owner bearing the risk of sudden loss if, for example, a lion were to kill the ox. The tenant, however, was bearing the risk of death as a result of negligence, for example, when the ox would fall into the canyon when grazing. ^[9] The tenant was given the grant of use for an animal, e.g., an ox as a draft animal, or animal products, e.g., milk from a dairy cow. In later phases of the Roman Empire, anchors were rented to a vessel owner for the duration of a journey, since the forgings had a very high individual value ^[10] and the individual ship owners otherwise could not afford these anchors. This helped to avoid the long idle times of the anchor during the overhaul period of the ship. In fact it was an economic effect due to the rental of anchors, and a method for reducing investment costs through efficient use of storage.

In the second half of the 19th century, the first significant commercial use assignments were noted in the wake of the industrial revolution. ^[11] The leasing business primarily developed in the U.S. first. Here, for the first time, the term

Page 4 of 16