| 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, 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. |
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| Advance
Payments |
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Payments
made by the lessee at the inception of a leasing transaction. |
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|
| Amortization |
| |
A
breakdown of periodic loan payments into two components: a principal
portion and an interest portion (not available on FMV products). |
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|
| APR |
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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). |
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|
| 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. |
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| 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. |
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|
| 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. |
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|
| Coterminous |
| |
Two
or more leases that are linked so that both will terminate at
the same time. |
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|
| 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. |
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|
| 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. |
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|
| 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 |
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|
| 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. |
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|
| 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 a tax lease, not all Fair Market Value
leases qualify as tax leases. |
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|
| 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. |
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|
| 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). |
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|
| 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. |
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|
| 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. |
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|
| 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. |
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|
| 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. |
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|
| 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 $1.00 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. |
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|
| Lease
Schedule |
| |
A
schedule to a Master Lease agreement describing the leased equipment,
rentals and other terms applicable to the equipment. |
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|
| 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. |
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|
| 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. |
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|
| 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. |
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|
| 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. |
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|
| 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. |
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|
| 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 not accounted for by the lessee whom will
not show either 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. |
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| Payment
in Advance |
| |
Periodic
payments are due at the beginning of each period. |
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|
| Payment
in Arrears |
| |
Periodic
payments are due at the end of each period. |
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|
| 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. |
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|
| Purchase
option |
| |
An
option given to the lessee to purchase the equipment from the
lessor, usually as of a specified date. |
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|
| Residual
Value |
| |
The
book value that the lessor depreciates a piece of equipment
to during the lease term, typically based on an estimate of
the future value, less a safety margin. |
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|
| 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. |
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|
| Skip-payment
Lease |
| |
A
lease that contains a payment stream requiring the lessee to
make payments only during certain periods of the year. |
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|
| 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. |
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|
| 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. |
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|
| 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. |
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|
| Upgrade |
| |
To
trade in leased equipment for a newer, more advanced model during
the lease term. |
