CLFP Exam - Classification & Terminology In
Leasing (Questions & Accurate Solutions)
Equipment Lease Definition Correct Ans - A transaction in
which USE AND POSSESSION but NOT TITLE to TANGIBLE
PROPERTY is TRANSFERRED FOR CONSIDERATION.
FASB 13 Lease Classification Correct Ans - For accounting
purposes, FASB 13 defines capital vs. operating lease.
None of the following may be present to be considered an operating
lease.
1. Automatic Title
2. Bargain Purchase Option
3. Term => 75% economic life
4. PV of minimum payments >= 90% FMV
Key Elements of a Lease Transaction Correct Ans - Who must
sign: Lessor and Lessee
Transfer of ownership occurs once vendor issues an invoice and that
invoice is paid in full.
Lease vs. Finance Contract Correct Ans - A Finance Contract is
not a lease. In a finance contract, also called an installment sale, the
titleholder and user of the equipment are the same.
Who are the parties in Third Party Leasing? Correct Ans - An
independent leasing company or lessor that writes leases involving
three parties:
1. unrelated MANUFACTURER OR DEALER
2. the independent LESSOR
3. the LESSEE
,What is section 38 property? Correct Ans - IRS defines
personal property that can be leased as depreciable property.
Section 38 property is property that can depreciate.
Leveraged Lease Correct Ans - Lease involving at minimum:
Lessee, Lessor, funding source. Lessor borrows significant portion of
the cost of the equipment and takes equity position in the
remainder.
Lessor assigns its rights to the lease and grants first security interest
in the equipment to the long-term creditor. Tax Oriented. Lessor
responsible for maintenance, insurance, taxes.
Discounting Correct Ans - When a company originates and
documents transaction as lessor and subsequently discounts the
stream to another funder. Lessor receives immediate payment of the
PV of the stream of payments. The company remains the lessor of
record and is ultimately responsible as the lessor.
Operating Lease Correct Ans - does NOT meet any of the FASB
13 guidelines; treated as a true periodic rental; lessee does not
record either property as an asset or corresponding liability on
balance sheet.
Capital lease Correct Ans - lease from accounting point of view
that meets any of the four FASB 13 criteria. Required to be shown as
an asset and related obligation on the balance sheet.
Full Payout Lease Correct Ans - A lease from which lessor can
reasonably expect to realize a return on its full investment in the
leased property plus the estimated cost of financing the property
over the term of the lease. Without any reliance upon the estimated
residual value of the leased equipment. EXAMPLE: $1 out lease.
, Finance Lease Correct Ans - net lease, which the financing of
the use of property is a major portion of the property's useful life.
Generic and often misleading term typically used in the industry to
describe a non-tax lease.
Net Lease Correct Ans - A lease in which all costs in connection
with the use of the property are paid for separately by lessee and
are not included in rental payment to lessor. Example: maintenance,
insurance, property taxes.
Master Lease Correct Ans - A form of documentation that
includes one document which outlines basic terms and conditions of
the lease agreement and then separate schedules referring back to
the main document.
Money over Money Lease Correct Ans - A non-tax lease or
conditional sale contract in the guise of a lease, in which the title is
intended to pass to lessee at end of term.
Closed End Lease Correct Ans - Lease where lessee has no
purchase or renewal options, they must return equipment at end of
lease.
Upfront Monies Correct Ans - Payments such as Security
Deposit, Advance Rentals, Origination Fee which can increase the
yield of the transaction.
Soft Costs Correct Ans - costs often associated with the
acquisition of equipment and can be included in a lease based upon
lessor's requirements.
At-Risk Correct Ans - IRS Code requiring party seeking
benefits such as interest deduction and deprecation to actually be
"at risk" for certain specified amounts.
Leasing (Questions & Accurate Solutions)
Equipment Lease Definition Correct Ans - A transaction in
which USE AND POSSESSION but NOT TITLE to TANGIBLE
PROPERTY is TRANSFERRED FOR CONSIDERATION.
FASB 13 Lease Classification Correct Ans - For accounting
purposes, FASB 13 defines capital vs. operating lease.
None of the following may be present to be considered an operating
lease.
1. Automatic Title
2. Bargain Purchase Option
3. Term => 75% economic life
4. PV of minimum payments >= 90% FMV
Key Elements of a Lease Transaction Correct Ans - Who must
sign: Lessor and Lessee
Transfer of ownership occurs once vendor issues an invoice and that
invoice is paid in full.
Lease vs. Finance Contract Correct Ans - A Finance Contract is
not a lease. In a finance contract, also called an installment sale, the
titleholder and user of the equipment are the same.
Who are the parties in Third Party Leasing? Correct Ans - An
independent leasing company or lessor that writes leases involving
three parties:
1. unrelated MANUFACTURER OR DEALER
2. the independent LESSOR
3. the LESSEE
,What is section 38 property? Correct Ans - IRS defines
personal property that can be leased as depreciable property.
Section 38 property is property that can depreciate.
Leveraged Lease Correct Ans - Lease involving at minimum:
Lessee, Lessor, funding source. Lessor borrows significant portion of
the cost of the equipment and takes equity position in the
remainder.
Lessor assigns its rights to the lease and grants first security interest
in the equipment to the long-term creditor. Tax Oriented. Lessor
responsible for maintenance, insurance, taxes.
Discounting Correct Ans - When a company originates and
documents transaction as lessor and subsequently discounts the
stream to another funder. Lessor receives immediate payment of the
PV of the stream of payments. The company remains the lessor of
record and is ultimately responsible as the lessor.
Operating Lease Correct Ans - does NOT meet any of the FASB
13 guidelines; treated as a true periodic rental; lessee does not
record either property as an asset or corresponding liability on
balance sheet.
Capital lease Correct Ans - lease from accounting point of view
that meets any of the four FASB 13 criteria. Required to be shown as
an asset and related obligation on the balance sheet.
Full Payout Lease Correct Ans - A lease from which lessor can
reasonably expect to realize a return on its full investment in the
leased property plus the estimated cost of financing the property
over the term of the lease. Without any reliance upon the estimated
residual value of the leased equipment. EXAMPLE: $1 out lease.
, Finance Lease Correct Ans - net lease, which the financing of
the use of property is a major portion of the property's useful life.
Generic and often misleading term typically used in the industry to
describe a non-tax lease.
Net Lease Correct Ans - A lease in which all costs in connection
with the use of the property are paid for separately by lessee and
are not included in rental payment to lessor. Example: maintenance,
insurance, property taxes.
Master Lease Correct Ans - A form of documentation that
includes one document which outlines basic terms and conditions of
the lease agreement and then separate schedules referring back to
the main document.
Money over Money Lease Correct Ans - A non-tax lease or
conditional sale contract in the guise of a lease, in which the title is
intended to pass to lessee at end of term.
Closed End Lease Correct Ans - Lease where lessee has no
purchase or renewal options, they must return equipment at end of
lease.
Upfront Monies Correct Ans - Payments such as Security
Deposit, Advance Rentals, Origination Fee which can increase the
yield of the transaction.
Soft Costs Correct Ans - costs often associated with the
acquisition of equipment and can be included in a lease based upon
lessor's requirements.
At-Risk Correct Ans - IRS Code requiring party seeking
benefits such as interest deduction and deprecation to actually be
"at risk" for certain specified amounts.
