HOW TO MAKE THE RIGHT LEASING DECISIONS

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1 HOW TO MAKE THE RIGHT LEASING DECISIONS 9480A

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3 HOW TO MAKE THE RIGHT LEASING DECISIONS RICHARD W. LOTT

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5 CONTENTS ABOUT THIS COURSE ix HOW TO TAKE THIS COURSE xi 1 LEASING: HISTORY AND TRENDS 1 LESSORS BASIC LEASE TYPES WHY LEASING IS SO POPULAR USE VERSUS OWNERSHIP TAX CONSIDERATIONS NONTAX ATTRIBUTES THE FUTURE INSTRUCTIONAL PROGRAMMING 1 2 DEFINITIONS OF LEASES FROM THE VIEWPOINTS OF ACCOUNTING, THE IRS, THE COURTS, AND INDUSTRY 9 FASB ACODUNTING DEFINITION OF A LEASE THE LESSEES VIEW THE LESSORS VIEW DEFINITIONS RELATED AND UNRELATED PARTIES IN A LEASING TRANSACTION INCEPTION OF THE LEASE FAIR MARKET VALUE OF THE LEASED PROPERTY BARGAIN PURCHASE OPTION BARGAIN RENEWAL OPTION LEASE TERM ESTIMATED ECONOMIC LIFE OF THE LEASED PROPERTY ESTIMATED RESIDUAL VALUE OF THE LEASED PROPERTY UNGUARANTEED RESIDUAL VALUE CONTINGENT RENTALS MINIMUM LEASE PAYMENTS INTEREST RATE IMPLICIT IN THE LEASE LESSEES INCREMENTAL BORROWING RATE INITIAL DIRECT COSTS SALES TYPE CAPITAL LEASE DIRECT-FINANCING LEASE LEVERAGED LEASE LEVERAGED LEASE NET INVESTMENT IRS DEFINITION OF A LEASE SAFE-HARBOR LEASING FINANCE LEASE TAX REFORM ACT OF 1986 IRS GUIDELINES COURT CRITIERA MINIMUM UNCONDITIONAL AT-RISK INVESTMENT LEASE TERM AND RENEWAL OPTIONS PURCHASE AND SALE RIGHTS NO INVESTMENT BY THE LESSEE NO LESSEE LOANS OR GUARANTEES PROFIT REQUIREMENT OTHER CONSIDERATIONS INDUSTRY DEFINITION OF A LEASE FULL-PAYOUT AND NON-FULL-PAYOUT LEASES NET, NET-NET, AND TRIPLE-NET LEASES FINANCIAL LEASE CLOSED- AND OPEN-ENDED LEASES PERCENTAGE LEASE MASTER. LEASE INSTRUCTIONAL PROGRAMMING 2

6 3 HOW CAPITAL LEASES AND OPERATING LEASES AFFECT LESSEES' FINANCIAL STATEMENTS 29 EFFECT ON FINANCIAL STATEMENTS EFFECT ON THE INCOME STATEMENT EFFECT ON THE BALANCE SHEET EFFECT ON THE STATEMENT OF CASH FLOWS EFFECT ON FINANCIAL RATIOS REVIEW OF ASSUMPTIONS DISCLOSURE REQUIREMENTS INSTRUCTIONAL PROGRAMMING 3 4 YIELD ANALYSIS AND NET PRESENT VALUE TECHNIQUES: THE LESSOR'S VIEWPOINT 3 9 YIELD ANALYSIS GROSS YIELDS SIMPLE GROSS PRETAX YIELD GROSS PRETAX YIELD WITH ADVANCE PAYMENT DISCOUNT INTEREST (OR ADD-ON INTEREST YIELD GROSS PRETAX YIELD WITH ADVANCE PAYMENT AND SECURITY DEPOSIT GROSS PRETAX YIELD WITH ADVANCE PAYMENT AND PURCHASE OPTION GROSS PRETAX YIELD WITH ADVANCE PAYMENT, SECURITY DEPOSIT, AND PURCHASE OPTION GROSS AFTER-TAX YIELD WITH ADVANCE PAYMENT, DEPOSIT, DEPRECIATION, AND PURCHASE OPTION CAPITAL-BUDGETING YIELDS CONVENTIONAL INTERNAL RATE OF RETURN (IRR) YIELD COST OF CAPITAL ADJUSTED INTERNAL RATE OF RETURN (IRR ADI.) RETURN ON EQUITY (ROE) YIELD MODIFIED RETURN ON EQUITY YIELD ACCOUNTING YIELDS PAYBACK AND MODIFIED PAYBACK METHODS CONVENTIONAL PAYBACK METHOD MODIFIED PAYBACK METHOD NET PRESENT VALUE CONVENTIONAL NET PRESENT VALUE ADJUSTED NET PRESENT VALUE SUMMARY OF RESULTS FROM THE ANALYTICAL METHODS GROSS YIELDS CAPITAL-BUDGETING YIELDS ACCOUNTING YIELD PAYBACK METHODS NET PRESENT VALUE TECHNIQUES INSTRUCTIONAL PROGRAMMING 4 5 ANALYZING A LEASING COMPANY THROUGH SPECIALIZED FINANCIAL STATEMENTS AND MODELS 67 MANAGERIAL INCOME STATEMENT CONFORMITY WITH GAAP TREATMENT OF DEPRECIATION TREATMENT OF DIRECT COSTS TREATMENT OF SECURITY DEPOSITS TREATMENT OF TAXES STATEMENT OF CASH FLOWS USING MANAGERIAL INCOME AND CASH FLOW STATEMENTS TO ANALYZE A LEASING COMPANY SINKING-FUND, OR ANNUITY, DEPRECIATION

7 SENSITIVITY MODEL PROFITABILITY TIME AT RISK ASSET UTILIZATION OTHER INCOME INITIAL DIRECT' COSTS COLLECTIONS WRITE-OFFS OPERATING EXPENSES INTEREST EXPENSES INCOME TAXES FINANCIAL LEVERAGE RETENTION RATIO THE VALUE OF THE SENSITIVITY MODEL INSTRUCTIONAL PROGRAMMING 5 6 THE LEASE-VERSUS-BUY DECISION: QUANTITATIVE METHOD 87 PRELIMINARY ASSUMPTIONS THE DECISION IS NOT ONE OF CAPITAL BUDGETING THE DECISION IS NOT A COMPARISON OF AN INSTALLMENT LOAN WITH A CAPITAL LEASE PRESENT VALUE TECHNIQUE AND COST MINIMIZATION ARE USED IN MAKING THE DECISION ALL REVENUES, BENEFITS, AND EXPENSES ARE CONSIDERED AFTER TAXES THE DECISION IS BASED ON THE AFTER-TAX, WEIGHTED AVERAGE COST OF CAPITAL NONQUANTITATIVE ASPECTS COME INTO PLAY ALL PERTINENT COSTS ARE INCLUDED THE DURATION OF THE LOAN COMPARED WITH THAT OF THE LEASE TERM IS CONSIDERED DISCOUNT PERIODS ARE USED IN PRESENT VALUE ANALYSIS LEASING AND PURCHASING COSTS FOOTNOTES INSTRUCTIONAL PROGRAMMING 6 7 ADDITIONAL FACTORS AFFECTING THE LEASE-VERSUS-BUY DECISION 101 THE PROS AND CONS OF LEASING CONCLUSION INSTRUCTIONAL PROGRAMMING 7 8 ACCOUNTING AND REPORTING FOR LEASES 111 LESSEE ACCOUNTING AND REPORTING FOR CAPITAL LEASES CAPITALIZATION OF THE LEASE DEPRECIATION OF THE CAPITALIZED ASSET AMORTIZATION OF LEASE PAYMENTS DISCLOSURE REQUIREMENTS DETERMINATION OF THE LESSOR'S IMPLICIT INTEREST RATE AN EXAMPLE OF LESSEE ACCOUNTING FOR A CAPITAL LEASE LESSEE ACCOUNTING AND REPORTING FOR OPERATING LEASES ACCOUNTING FOR LEASE PAYMENTS DISCLOSURE REQUIREMENTS LESSOR ACCOUNTING AND REPORTING FOR CAPITAL LEASES INITIAL ACCOUNTING FOR A SALES TYPE CAPITAL LEASE AN EXAMPLE OF A SALES TYPE LEASE THE SOLUTION THE T-ACCOUNT SUMMARY: SALES TYPE LEASE THE EFFECTIVE INTEREST METHOD INITIAL ACCOUNTING FOR A DIRECT-FINANCING LEASE AN EXAMPLE OF A DIRECT-FINANCING LEASE THE SOLUTION THE T-ACCOUNT SUMMARY: DIRECT-FINANCING LEASE THE EFFECTIVE INTEREST METHOD THE IMPLICIT INTEREST RATE DISCLOSURE REQUIREMENTS FOR SALES TYPE AND DIRECT-FINANCING LEASES LESSOR ACCOUNTING AND REPORTING FOR OPERATING LEASES LEASED PROPERTY REPORTING AND DEPRECIATION RENTAL PAYMENTS DISCLOSURE REQUIREMENTS INSTRUCTIONAL PROGRAMMING 8 INCOME TAX CONSIDERATIONS IN LEASING 131 TAX BENEFITS AND BURDENS-AN OVERVIEW

8 REPEAL OF THE INVESTMENT TAX CREDIT DEPRECIATION BUSINESS TAX RATES INTEREST OPERATING LEASES CAPITAL LEASES INSTRUCTIONAL PROGRAMMING 9 APPENDIX 139 BIBLIOGRAPHY 143 POST TEST 145 CASE STUDY SELECTED READINGS 16)7 INDEX 183

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