leasing Flashcards
lessor and lessee
lease agreement
the party who owns that asset
the party using the asset- pays lease rentals to the lessor over a period of time
leasing allows a company to
use an asset without owning it
features of lease
- Most leases involve little or no upfront payment.
- The lessee commits to make regular lease payments for the term of the contract.
- At the end of the contract term, the lease specifies who will retain ownership of the asset and at what terms.
when are lease payments typically made?
at the beginning of each payment period
what are the 2 basic types of leases
- operating leases
- financial eases
what does operating lease separate?
Operating leases separate the risks of ownership from the use of the leased asset
advantages of operating leases
- lower transaction costs
- convenience and flexibility,
- isurance against the risk of obsolescence.
describe the risk of ownership of financial leaes
the risks of ownership are borne by the user of the asset
financial leases
describe leasing of expensive assets and general use assets
Leasing of very expensive assets is driven by tax-related factors.
Except where there are significant tax advantages, leasing of specialised assets is much less common than leasing of general use or marketable assets, such as motor vehicles and computers.
lease payment formula
PV(lease payments) = purchase price - PV (residual value)
Sales-type lease?
the lessor is the manufacturer (or primary dealer) of the asset
nDirect Lease
¡A type of lease in which the lessor is not the manufacturer, but is often an independent company that specializes in purchasing assets and leasing them to customers
describe sale and lease-back
- owner sells an asset (usually at current market value)
- receives cash from sale of asset
- leases it back by making lease payments to use the asset
who is the lessor usually in a sale and lease-back agreement?
aninsurance company, although some superannuation funds, banks and specialist leasing companies also offer this form of finance.
leveraged leasing is a form of?
Leveraged leasing, which is a form of finance lease
describes levered lease
when lessor borrows from a lender (debt participant) to obtain the initial capital to purchase the asset, using lease payments to pay interest and principal on the loan
leveraged leasing
how much does the debt participant lend?
the debt participants are expected to contribute no more than 80 per cent of the cost of the asset.
leveraged leasing
who are the debt participants usually?
a life insurance company, superannuation fund, investment bank or bank.
the loan provided by the debt participant is a non-recourse loan. what does this mean
any implications?
the lessor has no recourse to the lessee in the event of a default
so the risk of default by the lessee must be very low
what is a cross-border lease?
a financial lease where the lessor and lessee are located in different countries
features of cross-border lease
- usually leveraged
- motivated by differences between the tax regulation of different countries
* different rates of company tax and depreciation shield - Generally structured so that the lessor and lessee can both claim depreciation deductions on the same asset.
cons of cross-border lease
high costs in establishing a CBL –> so it is only used for very expensive assets such as aircraft
requires specialised legal and taxation advice
what is a finance lease
long-term agreement that generally covers most of the economic life of an asset.
transfers benefits and costs of ownership of the asset from the lessor to the lessee
features of financial lease
- non-cancealleable or cancellable only if the lessee pays a substantial penalty to the lessor.
- , all of the risks and rewards associated with ownership of the leased asset are effectively transferred to the lessee
- The lease asset/liability equal to the fair value of the leased property or, if lower, the PV of the minimum lease payments must be recognized