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1. In addition to purchasing durable goods outright, institutional units can obtain the use of them in the following ways: operating leasing, financial leasing and hire purchase. In all three cases the institutional unit in question acquires the right to use a durable good, although the good legally remains the property of another unit. Leasing 2. When one institutional unit A owns a durable good and transfers the right to use this good to another unit B, A is said to be the ‘lessor’ and B the ‘lessee’. Payments from B to A in exchange for the transfer of user rights are called ‘rental payments’. The lessor may be identical with, or a subsidiary of, the producer or seller of the durable good, but the lessor may also be a completely independent unit with no ties to the producer or seller. All sorts of produced durable goods, from buildings and structures to consumer durables, may be the subject of leasing, and any kind of institutional unit may use leasing to obtain user rights over durable goods. The two types of leasing, operating and financial leasing, are treated quite differently in the system. Operating leasing

3. The lessee acquires the right to use a durable good for a certain period of time, which may be long or short and not necessarily settled in advance. When the leasing period expires, the lessor expects to receive his good back in more or less the same condition as when he hired it, apart from normal wear and tear. The lessor is then likely to hire the good to another lessee or to use it otherwise. Thus, the leasing period does not cover all, or a predominant part of, the good's economic lifetime. Units engaged in operating leasing possess expert knowledge about the kinds of durable goods they hire. They keep stocks of these goods to be able to hire them on demand or at short notice. Usually they offer a variety of models to choose from. In order to keep their durable goods in good working order, lessors must carry out maintenance and repair services on goods awaiting hire. Lessors also normally assume responsibility for repair and maintenance of a good, as well as replacement in case of a breakdown, while the good is hired to a lessee. Operating leasing does not cover situations where the owner of equipment also provides staff to operate the equipment, or the hiring of non-produced assets, as these activities are classified elsewhere (see paragraph 7).

4. The lessee acquires the right to use a durable good in exchange for rental payments over a predetermined and protracted term. If all risks and rewards of ownership are, de facto though not de jure, transferred from lessor to lessee, the lease is a financial one. In financial leasing, the leasing period covers all, or most of, the economic lifetime of the durable good. At the end of the leasing period the lessee often has the option to buy the good at a nominal price. The lessor does not need to possess any expertise about the good in question. He offers no repair, maintenance or replacement services to the lessee. Normally, the good is chosen by the lessee and delivered directly to him by the producer or seller. The lessor's role is thus purely financial. The ESA recognizes the economic reality behind financial leasing by recording it as follows: the lessor provides the lessee with a loan enabling the lessee to purchase a durable good, of which the lessee becomes the de facto owner. Thus, the system treats the durable good as if owned by the lessee from the beginning of the leasing period. Rentals actually paid by the lessee to the lessor have to be subdivided into repayments of principal and interest payments related to the imputed loan.

Hire purchase 5. A durable good is sold to a purchaser in return for agreed future payments. The buyer takes possession of the good immediately, though in law it remains the property of the seller or financier as collateral/guarantee until all agreed payments have been made. Hire purchase is usually restricted to consumer durables, and most purchasers are households. Financiers of hire purchase contracts are typically separate institutional units operating in close cooperation with sellers of durable goods. TREATMENT IN THE ACCOUNTS Operating leasing

6. A durable good purchased by a lessor for the purpose of leasing is part of the lessor's gross fixed capital formation (P.51) and is shown as a tangible fixed asset (AN.III) in the lessor's balance sheet during its entire economic life. Subsequent capital consumption (K.1) in respect of the durable good is recorded in the lessor's accounts. Rental payments received by a lessor are shown in his production account as output (P.1) of leasing services. If the lessee is a producer, rental payments are part of his intermediate consumption (P.2). When the lessee is a household acting as a final consumer, rental payments are part of his final consumption expenditure (P.3).

7. In NACE Rev

2 ◄ , operating leasing of real estate is classified in class 68.20 ‘Renting and operating of own or leased real estate’. ◄ Operating leasing of other durable goods is classified in division 77 ‘Rental and leasing activities’ ◄ . Operating leasing does not comprise the renting of machinery or equipment with operating staff, which is classified according to the services provided by the equipment and staff. For example, the hiring of a lorry with driver is classified in class 49.41 ◄ ‘Freight transport by road’. Institutionally, operating leasing corporations are classified in sector S.11 ‘Non-financial corporations’, but operating lessors may also be found in sector S.14 ‘Households’. If the lessor is resident while the lessee is non-resident, rental payments are shown as exports of services (P.62). As the leased good remains on the balance sheet of a resident unit (the lessor), the good does not appear in any of the rest of the world accounts. If the lessor is non-resident while the lessee is resident, rental payments are recorded as imports of services (P.72). In this case the good itself is not considered to enter the economic territory (only its services are). Thus the leased good appears neither in the rest of the world accounts nor in any other account.

Financial leasing 8. If the lessee is a producer, the durable good is shown as gross fixed capital formation (P.51) for the lessee at the beginning of the leasing period. Throughout the leasing period (unless the lessee defaults on the rental payments) the good is shown as a tangible fixed asset (AN.III) in the balance sheet of the lessee. Subsequent capital consumption (K.1) is shown in the accounts of the lessee. At the end of the leasing period, either (i) the lessee buys the good at its residual value when it remains on his balance sheet, or (ii) the good reverts to the lessor, when it is shown as negative gross fixed capital formation for the lessee and thus leaves the lessee's balance sheet, and may enter the balance sheet of the lessor or that of a third party, to whom the lessor has sold on.

9. If the lessee is a household acting as a final consumer, the durable good is treated as if bought by the lessee for the purpose of final consumption at the beginning of the leasing period. This means that the purchaser's price of the leased good is part of the lessee's final consumption expenditure (P.3) at the beginning of the leasing period and that the good appears only as a consumer durable in the memorandum item to his balance sheet. A loan (F.4) is imputed from lessor to lessee. The principal of this loan is the purchaser's price of the leased good plus transfer costs (if any). The outstanding imputed loan (AF.4) is shown in the lessor's and lessee's balance sheets as a financial asset and liability, respectively. Payments of rental are considered to comprise two elements, repayment of principal (F.4) and interest (D.41), with the final repayment coinciding with the termination of the financial lease.

10. The interest rate on the imputed loan is implicitly determined so that accumulated repayments over the leasing period exactly equal the principal. When rental remains constant from period to period, the interest part of rental will decline over time, while the repayment part will increase correspondingly, as for a loan payable in equal instalments. When principal, rental and length of the leasing period are known for each contract, the interest rate, the interest payments and the repayments can easily be calculated using standard formulae. When detailed data on each leasing contract are not available, which is often the case in practice, reasonable assumptions must be made in order to carry out these calculations. In many countries business accounting treats financial leasing in a similar way as described here, which facilitates the data situation.

11. Financial lessors' productive activity is financial intermediation. Usually lessors do not charge explicitly for their intermediation services. Their output is therefore mainly or exclusively financial intermediation services indirectly measured (Fisim), calculated similarly to other financial intermediaries: property income receivable less interest payable, excluding any property income receivable from the investment of their own funds ◄ (). Some financial lessors incur liabilities to other independent units when interest payable is observable and the calculation of Fisim is straightforward. Other financial lessors incur liabilities only to their parent companies when interest payable may be difficult to observe. In the latter case it may be necessary to estimate the amount of interest payable by using an appropriate interest rate. Financial leasing corporations are classified in the institutional subsector S.123 ‘Other financial intermediaries except insurance corporations and pension funds’. The activity classification is NACE Rev. 2 ◄ class 64.91 ◄ ‘Financial leasing’.