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Financial Glossary |
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- Add-On
- A transaction to add related equipment to an existing lease. Typically,
this term is used when the new equipment is financed using the same lease
structure (i.e, Fair Market Value, $1.00 Purchase Option, Fixed Purchase
Option, etc.) as was used in the underlying transaction except that the
lease term for the add-on is set so that it expires coterminously with
(on the same date as) the original transaction.
- Advance Payments
- Payments made by the lessee at the inception of a leasing transaction.
- Amortization
- A breakdown of periodic loan payments into two components: a principal
portion and an interest portion.
- APR
- Annual Percentage Rate. The effective rate taking into account compounding
and other fees. The nominal rate of interest for a specified period (usually
one year).
- Bargain Purchase Option
- An option given to the lessee to purchase the equipment on lease at
a price that is less than the expected fair market value so that, at the
inception of the lease, it is reasonable to assume that the lessee will
definitely purchase the equipment on the option date.
- Capital Lease
- A lease that meets at least one of the criteria outlined in paragraph
7 of FASB 13 and, therefore, must be treated essentially as a loan for
book accounting purposes. The four criteria are:
- title passes automatically by the end of the lease term
- lease contains a bargain purchase option (i.e., less than the fair
market value)
- lease term is greater than 75% of estimated economic life of the equipment present value of lease payments is greater than 90% of the equipment's fair market value
- A Capital Lease is treated by the lessee as both the borrowing of funds
and the acquisition of an asset to be depreciated; thus the lease is recorded
on the lessee's balance sheet as an asset and corresponding liability (lease
payable). Periodic lessee expenses consist of interest on the debt and
depreciation of the asset.
- Capped Fair Market Value Lease
- A Fair Market Value Lease with a predetermined ceiling to limit Fair
Market exposure at the end of the lease term.
- Conditional Sales Contract
- The Seller sells the asset and transfers possession to the Purchaser,
but retains title to the asset until the Purchaser has fully paid for it.
In other words, a contract for a sale where the customer pays for his purchase
in installment payments rather than all at once.
- Coterminous
- Two or more leases that are linked so that both will terminate at the
same time.
- Depreciation
- A tax deduction representing a reasonable allowance for exhaustion,
wear and tear, and obsolescence, that is taken by the owner of the equipment
and by which the cost of the equipment is allocated over time. Depreciation
decreases the company's balance sheet assets and is also recorded as an
operating expense for each period. Various methods of depreciation are
used which alter the number of periods over which the cost is allocated
and the amount expensed each period.
- Discount Rate
- A certain interest rate that is used to bring a series of future cash
flows to their present value in order to state them in current, or today's,
dollars. Use of a discount rate removes the time value of money from future
cash flows.
- Estimated Useful Life
- The period during which an asset is expected to be useful in trade
or business.
- used for purposes of calculating the maximum allowable term of a tax lease.
- used for determining whether or not the lease is a Capital Lease.
- used to determine the method of depreciation for a capitalized leased asset.
- may or may not be the same as the life used for income tax purposes.
- Fair Market Value
- The price for which property can be sold in an "arms length"
transaction; that is, between informed, unrelated, and willing parties,
each of which is acting rationally and in its own best interest.
- CSC Fair Market Value Lease
- A lease which includes an option for the lessee to either renew the
lease at a fair market value renewal or purchase the equipment for its
fair market value at the end of the lease term. Though often referred to
as tax leased, not all CSC Fair Market Value Leases qualify as tax leases.
- Finance Lease
- A lease used to finance the purchase of equipment; not a true lease.
Finance leases are generally considered to be capital leases from an accounting
perspective and non-tax leases from a tax perspective.
- Financial Accounting Standards Board 13
- Statement number 13 of the Financial Accounting Standards Board (FASB)
which establishes standards for lessees' and lessors' accounting and reporting
for leases. This includes the characterization of a lease as an operating
lease or capital lease for the lessee's purposes.
A company's assets, liabilities and net income will differ depending on
how it chooses to structure its leases. The provisions of FASB 13 derive
from the view that a lease that transfers substantially all of the benefits
and risks of ownership should be accounted for as the acquisition of an
asset and the incurrence of an obligation by the lessee (a capital lease)
and as a sale or financing by the lessor. Other leases should be accounted
for as the rental of property (operating leases).
- Fixed Purchase Option
- An option given to the lessee to purchase the leased equipment from
the lessor on the option date for a guaranteed price. Both the date and
the price must be determined at the inception of the lease. A typical fixed
purchase option is 10% of the original cost of the equipment.
- Full Payout Lease
- A lease in which the total of the lease payments pays back to the lessor
the entire cost of the equipment including financing, overhead, and a reasonable
rate of return, with little or no dependence on a residual value.
- Incremental Borrowing Rate
- The rate that, at the inception of the lease, the lessee would have
incurred to borrow over a similar term the funds necessary to purchase
the leased asset.
- Lease
- A contract through which an owner of equipment (the lessor) conveys
the right to use its equipment to another party (the lessee) for a specified
period of time (the lease term) for specified periodic payments.
- Lease Purchase
- Full payout, net leases structured with a term equal to the equipment's
estimated useful life. Because many Lease Purchases include a bargain purchase
option for the lessee to purchase the equipment for one dollar at the expiration
of the lease, these leases are often referred to as dollar buyout or buck-out
leases. Lease Purchases are generally considered to be Capital Leases from
an accounting perspective and non-tax leases from a tax perspective due
to their bargain purchase option and length of lease term.
- Lease Schedule
- A schedule to a Master Lease agreement describing the leased equipment,
rentals and other terms applicable to the equipment.
- Lessee
- The party to a lease agreement who is obligated to pay the rentals
to the lessor and is entitled to use and possess the leased equipment during
the lease term.
- Lessor
- The party to a lease agreement who has legal or tax title to the equipment
(in the case of a true tax lease), grants the lessee the right to use the
equipment for the lease term and is entitled to receive the rental payments.
- Master Lease
- A continuing lease arrangement whereby additional equipment can be
added from time to time merely by describing that equipment in a new lease
schedule executed by the parties. The original lease contract terms and
conditions apply to all subsequent schedules. To be contrasted with a lease
contract for a single transaction involving a specific unit of equipment,
a Master Lease is essentially a line of credit to draw from over time in
order to purchase equipment.
- Municipal Lease
- A lease designed to meet the special needs of state and local governments.
The lease contains a non- appropriation clause which states that the only
condition under which the entity may be released from its payment obligation
is when the legislature or funding authority fails to appropriate funds.
Since the lessee is a municipality or an organization supporting the government,
it is exempt from paying federal income taxes. For this reason, the IRS
does not charge the lessor income taxes on leases to these customers.
- Off Balance Sheet Financing
- A lease that qualifies as an Operating Lease for the lessee's financial
accounting purposes. Such leases are referred to as off-balance sheet financing
due to their exclusion from the balance sheet asset and debt presentation,
except for that portion of the payments that is due in the current fiscal
period. Full disclosure of such transactions is typically made in the auditor's
notes to the financial statements. Periodic payments are recorded as expense
items on the lessee's income statement.
- Operating Lease
- A lease which is treated as a true lease (as opposed to a loan) for
book accounting purposes. As defined in FASB 13, an operating lease must
have all of the following characteristics:
- lease term is less than 75% of estimated economic life of the equipment.
- present value of lease payments is less than 90% of the equipment's fair
market value.
- lease cannot contain a bargain purchase option (i.e., less than the fair
market value).
- ownership is retained by the lessor during and after the lease term.
- An operating lease is accounted for by the lessee without showing an asset
(for the equipment) or a liability (for the lease payment obligations)
on his balance sheet. Periodic payments are accounted for by the lessee
as operating expenses of the period.
- Payment in Advance
- Periodic payments are due at the beginning of each period.
- Payment in Arrears
- Periodic payments are due at the end of each period.
- Present Value
- The discounted value of a payment or stream of payments to be received
in the future, taking into consideration a specific interest or discount
rate. Present Value represents a series of future cash flows expressed
in today's dollars.
- Purchase Option
- An option given to the lessee to purchase the equipment from the lessor,
usually as of a specified date.
- Residual Value
- The book value that the lessor depreciates a piece of equipment down
to during the lease term, typically based on an estimate of the future
value, less a safety margin.
- Sale-leaseback
- A transaction that involves the sale of equipment to a leasing company
and a subsequent lease of the same equipment back to the original owner,
who continues to use the equipment.
- Skip-payment Lease
- A lease that contains a payment stream requiring the lessee to make
payments only during certain periods of the year.
- Step-up or Step-down
- A feature of a lease that contains a payment stream that either increases
(step-up) or decreases (step-down) in amount over the term of the lease.
- Tax-Exempt Entity
- Tax-Exempt Entities, for federal income tax purposes, generally include:
any federal, state or local government (including their agencies and instrumentalities);
any organization that is exempt from federal income taxes, such as non-profit
charitable organizations; and most foreign persons or entities, unless
a significant portion of their gross income is subject to federal income
tax.
- Tax Lease
- A generic term for a lease in which the lessor takes the risk of ownership
(as determined by various IRS pronouncements) and, as the owner, is entitled
to the benefits of ownership, including tax benefits.
- Useful Life
- The period of time during which an asset will have economic value and
be usable. The useful life of an asset is sometimes called the economic
life of the asset. To qualify as an operating lease, the property must
have a remaining useful life of 25 percent of the original estimated useful
life of the leased property at the end of the lease term, and at least
a life of one year.
- Upgrade
- To trade in leased equipment for a newer, more advanced model during
the lease term.
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