CLFP EXAM LATEST
Brokering - ANSWERS-Simplest form of external funding. A party acts
as intermediary between lessee and funding source. The party earns a fee
or commission at time of funding.
What are the advantages and disadvantages associated with brokering -
ANSWERS-Advantages - little economic risk, funding source is taking
all of the credit and equipment risk, broker's risk limited to
representations and warranties. Funding source is responsible for
administration, servicing, collections and related costs (i.e. sales, use,
and property taxes). Disadvantages - profit is limited to commission,
funding source is entitled to income on transactions (late fees, gains on
early terminations, and residuals)
What is discounting? what types are there? - ANSWERS-lessor sells
remaining rents of a lease to a funding source while retaining ownership
of leased equipment. (a) recourse - the buyer of the rental stream has full
or partial recourse against the lessor should the lessee default (b) non-
recourse
What are some of the benefits and risks associated with discounting? -
ANSWERS-Benefits - increased revenue from servicing fees, late
charges, sale of equipment, and lease renewals. Lower cost of funds,
flexibility, brand identity, improved service levels. Risks - representation
and warranty clauses, equipment risk, credit risk up to level of recourse
in the discounting agreement, and taxes
END OF
PAGE
1
, CLFP EXAM LATEST
What do lenders consider when issuing debt to lessors for leased
transactions - ANSWERS-(a) experience & reputation of owners and
management (b) amount of capital (c) history and stability of operations
(d) financial reports and portfolio performance (e) income tax (f) credit,
financial, and business risk
What should a lessor consider when evaluating debt to fund lease
transactions - ANSWERS-(a) cash flow (b) flexibility (c) cost of funds
(d) interest rate exposure (e) credit and financial risk (f) debt to equity
ratio
What is securitization - ANSWERS-The aggregation of similar assets
(equipment leases) into a legal structure for use as collateral to support a
bond (public/private) or note. Benefits - low cost of funds, accounting
treatment, and access to capital markets
What are the two types of asset securitization - ANSWERS-(a)
Commercial paper conduits (complex, expensive, and usually only used
for transactions > $50MM (b) Securitization
In discounting, the obligation of checking and accepting credit is with? -
ANSWERS-Lessor
END OF
PAGE
2
, CLFP EXAM LATEST
The benefits of funding transactions through________ are low volume
requirements, minimal risk, and upfront revenue. - ANSWERS-Non-
recourse discounting
What form of funding relies primarily on the financial strength of the
originator? - ANSWERS-Recourse discounting
Which party in a discounting relationship holds title to the leased
equipment? - ANSWERS-Lessor
What is Incremental Borrowing Rate (IBR) - ANSWERS-The rate that,
at lease inception, the lessee would've incurred to borrow under like
terms to purchase the asset. Important for determining if a lease qualifies
under FASB 13 rules (90% test).
Name two types of accounting - ANSWERS-(a) Cash -
revenue/expenses are recorded when cash is received/spent (taxes are
cash based) (b) Accrual - revenue/expenses are recorded when
earned/incurred.
END OF
PAGE
3
, CLFP EXAM LATEST
Straight line Depreciation - ANSWERS-Same amount is depreciated
each month. Maximizes reported GAAP net income.
What are 3 ways assurance is established for financial statements -
ANSWERS-(a) audit - highest level of assurance (b) review (c)
compilation
How does the lessor account for operating leases on their income
statement? - ANSWERS-Lessor records rental payments under
Revenues as "Rental Income" and equipment depreciation under
Expenses as "Depreciation Expense" with the resulting change in Net
Income.
How does the lessor account for operating leases on the balance sheet? -
ANSWERS-Lessor records an Asset for "Leased Property" (net of
depreciation), a Liability for Accounts Payable (equipment cost paid to
vendor), and Equity would increase proportionally to the OEC. If lessor
paid cash for the leased equipment the Asset "Cash" would decrease. If
lessor borrowed to pay for the leased equipment the Liability "Long
Term Debt" would increase.
How does the lessor account for capital leases on the balance sheet? -
ANSWERS-Lessor records an Asset for "Net Investment in Leases", a
Liability for Accounts Payable (equipment cost paid to vendor), and
END OF
PAGE
4
Brokering - ANSWERS-Simplest form of external funding. A party acts
as intermediary between lessee and funding source. The party earns a fee
or commission at time of funding.
What are the advantages and disadvantages associated with brokering -
ANSWERS-Advantages - little economic risk, funding source is taking
all of the credit and equipment risk, broker's risk limited to
representations and warranties. Funding source is responsible for
administration, servicing, collections and related costs (i.e. sales, use,
and property taxes). Disadvantages - profit is limited to commission,
funding source is entitled to income on transactions (late fees, gains on
early terminations, and residuals)
What is discounting? what types are there? - ANSWERS-lessor sells
remaining rents of a lease to a funding source while retaining ownership
of leased equipment. (a) recourse - the buyer of the rental stream has full
or partial recourse against the lessor should the lessee default (b) non-
recourse
What are some of the benefits and risks associated with discounting? -
ANSWERS-Benefits - increased revenue from servicing fees, late
charges, sale of equipment, and lease renewals. Lower cost of funds,
flexibility, brand identity, improved service levels. Risks - representation
and warranty clauses, equipment risk, credit risk up to level of recourse
in the discounting agreement, and taxes
END OF
PAGE
1
, CLFP EXAM LATEST
What do lenders consider when issuing debt to lessors for leased
transactions - ANSWERS-(a) experience & reputation of owners and
management (b) amount of capital (c) history and stability of operations
(d) financial reports and portfolio performance (e) income tax (f) credit,
financial, and business risk
What should a lessor consider when evaluating debt to fund lease
transactions - ANSWERS-(a) cash flow (b) flexibility (c) cost of funds
(d) interest rate exposure (e) credit and financial risk (f) debt to equity
ratio
What is securitization - ANSWERS-The aggregation of similar assets
(equipment leases) into a legal structure for use as collateral to support a
bond (public/private) or note. Benefits - low cost of funds, accounting
treatment, and access to capital markets
What are the two types of asset securitization - ANSWERS-(a)
Commercial paper conduits (complex, expensive, and usually only used
for transactions > $50MM (b) Securitization
In discounting, the obligation of checking and accepting credit is with? -
ANSWERS-Lessor
END OF
PAGE
2
, CLFP EXAM LATEST
The benefits of funding transactions through________ are low volume
requirements, minimal risk, and upfront revenue. - ANSWERS-Non-
recourse discounting
What form of funding relies primarily on the financial strength of the
originator? - ANSWERS-Recourse discounting
Which party in a discounting relationship holds title to the leased
equipment? - ANSWERS-Lessor
What is Incremental Borrowing Rate (IBR) - ANSWERS-The rate that,
at lease inception, the lessee would've incurred to borrow under like
terms to purchase the asset. Important for determining if a lease qualifies
under FASB 13 rules (90% test).
Name two types of accounting - ANSWERS-(a) Cash -
revenue/expenses are recorded when cash is received/spent (taxes are
cash based) (b) Accrual - revenue/expenses are recorded when
earned/incurred.
END OF
PAGE
3
, CLFP EXAM LATEST
Straight line Depreciation - ANSWERS-Same amount is depreciated
each month. Maximizes reported GAAP net income.
What are 3 ways assurance is established for financial statements -
ANSWERS-(a) audit - highest level of assurance (b) review (c)
compilation
How does the lessor account for operating leases on their income
statement? - ANSWERS-Lessor records rental payments under
Revenues as "Rental Income" and equipment depreciation under
Expenses as "Depreciation Expense" with the resulting change in Net
Income.
How does the lessor account for operating leases on the balance sheet? -
ANSWERS-Lessor records an Asset for "Leased Property" (net of
depreciation), a Liability for Accounts Payable (equipment cost paid to
vendor), and Equity would increase proportionally to the OEC. If lessor
paid cash for the leased equipment the Asset "Cash" would decrease. If
lessor borrowed to pay for the leased equipment the Liability "Long
Term Debt" would increase.
How does the lessor account for capital leases on the balance sheet? -
ANSWERS-Lessor records an Asset for "Net Investment in Leases", a
Liability for Accounts Payable (equipment cost paid to vendor), and
END OF
PAGE
4
