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PROJECT TOPIC: AN ASSESSMENT OF ACCOUNTING SYSTEM IN THE LEASING INDUSTRY, (A CASE STUDY OF JOHN HOLT PLC LAGOS)

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CHAPTER ONE

1.1 BACKGROUND OF THE STUDY 

      Leasing is an alternative source of finance in Nigeria, the importance of leasing in capital investment in the world over cannot be over emphasized, but is yet to take a firm root in Nigeria, this is because, this is because the syndrome of owning everything is still in vogue in the country, the credit evasive is still very high in Nigeria, this singular reason account t for the low patronage of leasing as an alternative source of finance in the country, leasing has many definitions, but the legal definition as  given by the statement of accountancy no ii. Says “leasing is a contractual agreement between owner (lessor) and another party the (lessee)” which conveys to the lessor, the right to use the leased asset for a consideration, usually a periodic charge called rentals.     

      As it can be seen from the above, the concept of leasing envisaged  the separation of ownership from the economic use of an asset , this is a fundamental characteristics of leasing, all other features flows from the basic level, this form of credit level   is  totally different from other forms of finance because it only involve an exchange of asset for a periodic rental, since this form of credit is evolving, there is the need therefore for a standard evaluation and accounting system on the subject, this appreciation of leasing came to limelight in  Nigeria in the early 80s, this was made possible because of the austerity measure introduced by the democratic administration of Sheu Shagari and  the subsequent introduction of structural adjustment (SAP) in  Nigeria being a Mono-cultured economy that depended wholly on crude oil for her revenue  and the continuous fall of crude oil price in the international market, because  of this, it then became imperative for business to source their capital investment and needs elsewhere.

      The uncertainty which paraded the economy made it difficult for financial institutions to go into medium and long term credit financing. Hence, the appreciation of leasing by both lessor and the lessee, there are however   two main categories of leasing:

1.     Operating leasing:- this is where the lessor while giving the lessees the use of basic properties retains practically all the risk, obligations and reward of ownership.

2.     Finance capital lease: - this is where the lessor transfers the risk of ownership and reward to the lessee who is obligated to pay such cost as insurance maintenance, and similar charges on the property.

FEATURES OF FINANCE LEASE (SASII)

i.                   The lease is not concealable.

ii.                The lessee assumes most of the risk and reward of ownership.

iii.             The lease term covers substantially (80% or more) of the useful life of the asset.

iv.              The lessee is responsible for repairs, maintenance and insurance of the assets.

v.                 The lessor has the right of repossession when certain speculated contract conditions are breached.    

1.2 STATEMENT OF THE PROBLEM

      As it can be seen from the background of the study Hence, on accounting for lease, there are numerous problems of which some  are:

a.     Cost of capital :- the cost of capital is difficult to determine because it depend on the capital structure of the lessor, if the cost of capital is high, then the rental may be prohibitive and vice – versa.

b.     Taxation: - the position of the lesser   will impact significantly on the rental and the frequent charge may be an advantage to the lesser.

c.      Accounting treatment: - at times, the lease are not treated according to the classification i.e. operating lease being treated as a financial lease.

1.3 RESEARCH QUESTION         

      The primary purpose of this work entitled accounting system in the leasing industry, therefore, is to evaluate the adequacy of the treatment adopted by various leasing industries in the treatment of their accounting entries and in formation and  how they merge accounting theory with practice as profit making organization.

      The examination will indicate whether there is a slight variance in the accounting system adopted in reporting various leases.

1.4 SIGNIFICANCE OF THE STUDY    

      The significance of this research project is to enable one to appreciate the proper treatment of the various lease transaction in the financial record of leasing companies, the maintenance of proper accounting of financial records tends to improve the leasing service generally.

      In all business endeavors, cost and time are of paramount importance, and has to be controlled at all time, the accounting system adopted will go a long way in controlling these items.

      Finally, this work will ensure that the information provided by leasing companies in their financial statement can be evaluated and compared with other companies in the industry.

1.5 SCOPE OF THE STUDY        

      We do not intend to cover all the accounting system in leasing transactions business, our work is confined to accounting system in the leasing industry only, the scope of this work do not cover the following areas.

-         Leasing agreement pertaining to exploitation or exploration of mineral resources such as Oil, gas, minerals and timber.

-         Leases in favor of contractor financing the development of landed properties.

-         Lease agreement relating to licensing of intellectual properties such as motion, pictures, video recordings, manuscripts, patients and copyrights.

1.6 LIMITATIONS       

As we all now that no human effort to achieve a set of goals goes without difficulties, certain constraints were encountered in the course of carrying out this project and they are as follows:-

1.     Difficulty in collection of data: - this is due to the skeptic nature of human beings most especially those in competitive business towards the release of needed information; this may be caused by the constant fear of not willing to release trade secrets.

2.     Difficulty in identifying the contribution of leasing income in the financial statement of most companies engaged in leasing as an opportunity to take advantage of tax incentives.

3.     Prudential guide lines: -  another limitation is that imposed by the central bank of Nigeria monetary and fiscal policy from year to year, popularly known as prudential guidelines.

1.7 RESEARCH QUESTIONS   

      The research study is designed to answer the following questions, after the completion of the study, the questions are:

1.     Does an assessment of accounting provide a framework for decision making in the leasing industry.

2.     Does assessment of accounting system has impact in the industry.

3.     Does an assessment of accounting leads to attainment of organizational goals in the industry.

4.     Does it impact on the overall objective of the industry

5.     Does it have impact on the profitability ratio of the industry?

1.8 PLAN OF THE STUDY         

      This section will contain the brief content of each chapter, chapter one will have the background of the study, statement of the research problem, purpose of the study, significance of the study, scope and limitations of the study research question, plan of the study, and the definition of various s terms.

      Chapter two will treat the literature review of leasing business, meaning of leasing, genesis of leasing, and an evaluation of income recognition.

      While chapter three will discuss the research method, research approach to the work, sources of information, reliability of data, sample , scope , time and finance.

      Moreso, chapter four will discuss the analysis of data, presentation of data, profile of the respondents, work duration, other findings, research findings and testing of hypothesis,

      Finally, chapter five will discuss summary, recommendations, conclusion and bibliography.


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