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The Difference of Finance Lease Transactions and Installment Sales


Installment sale is a sale and purchase contract in which divided payment and reception are promised. In general, sellers temporarily retain the ownership of equipment until payment is completed. Installment Sales Law defines that 'designated goods should be sold on the condition that its consideration is recovered in three or more installments for over two months.' And Corporation Tax Law defines that 'Installment sale is based upon the stipulations that regulate the payment of its consideration by way of monthly or annual installments', and that it means 'transfer with deferred payment' on the condition that payment is divided by three times or more for over two years,

Lease accounting standards stipulates that accounting treatment of finance lease transaction in principle should be adjusted to be the same as that of installment sales, because finance lease transaction brings lessees the same kind of economic effect as in purchasing equipment by installments or borrowed money. There are differences between Japanese finance lease transactions and installment sales.

  Finance Lease Transactions Installment Sales
Purpose of Contract The purpose of interested parties is to let. Lessors let equipment; lessees use it and make a profit. The purpose of interested parties is to sell and purchase. Buyers desire to purchase equipment by installments; sellers respond in order to merchandise.
Equipment Ownership Lessors have the equipment ownership from beginning to end.Sellers retain equipment ownership as a security for recovering consideration. After the cost is liquidated, the ownership is transferred to buyers.
Intended Equipment Almost all equipment and others (excepting those treated as sale and purchase for tax purpose) In principle, those equipment whose security value will not remarkably decrease is intended in view of risk of consideration recovery.
Contract Term Comparatively long. It is decided by the regulations for tax purposes and lessees' proposals. From a couple of months to several years. It may be shorter than the lease term in view of risk of consideration recovery and risk of decrease of security value.
Down Payment No down payment. However, payment of two or three monthly rent is ordinarily needed. Down payment should be paid by approximately 30% of purchase cost.
Management of Affairs Lessors take charge of management of affairs, such as calculation of depreciation expenses and return and payment of fixed assets tax, and payment of insurance expenses. Buyers take charge of management of affairs from the beginning of contract, whenever ownership is transferred.
Disposal of Equipment The recovered leased property after the lease term is disposed by lessors based on the Waste Management Law or others. Buyers dispose equipment based on the Waste Management Law or others.

The finance lease transactions intended to real estate, buildings, items attached to buildings, construction equipment, and machinery for special purposes are treated as sale and purchase transactions for tax purposes. (Also treated as letting transactions.) Leasing companies engage in installment sale transactions and similar ones; however, those transactions are corresponding to neither 'purpose of contract,' 'intended equipment,' nor 'contract term' of installment sales above.