CLFP Part 1 History and Purpose of Leasing exam with complete solution graded A+

What are Lease versus buy considerations? - Tax Benefits Accounting & Financial Reporting Budgetary Minimize Cash Outlay Obsolescence What are Options when a lease terminates? - Variations of Purchase, Renew, Return What are Differences between operating and true leases? - Operating lease meets none of the of FASB 13 criteria and has characteristics of a usage or rental agreement. True Lease meets none of the criteria for a lease intended as security for tax purposes and it may Or may not qualify as an operating lease. List types of equipment that can be leased - Communications, Computers, agricultural, construction, furniture and fixtures, medical, office, software, trucks and trailers, aircraft, marine, auto, bus, railroad, manufacturing, etc. List some reasons why leasing is a popular method of financing - Tax benefits Hedge against obsolescence Availability of most up to date technology Minimal cash outlay What are the CLFP Standards of Professional Conduct? - 1. Strive to conduct business in honest, ethical, and professional manner 2. Respect ownership of funds delivered as advanced fees or security deposits and treat in a fiduciary capacity all funds received in that capacity 3. Constantly gain education to improve professional competency and work to promote education and integrity within the leasing industry4. Never knowingly make false or misleading statements to employer, employees, customers, vendors, brokers, or funding sources 5. Never be involved in fraudulent activities What is depreciation and why is it important to leasing? - Depreciation is a large deduction for many companies. Depreciation is the reduction in value of an asset with the passage of time due to wear and tear. Depreciation is a tax benefit, AMT, Alternative Minimum Tax limits the amount of depreciation a company can take. Leased equipment is not depreciated so it can reduce tax liability. What is ITC? - Investment Tax Credits, ITC, were introduced by Congress in the 60's to stimulate the economy. When Feds need money they take away ITC when they need to stimulate capital expenditures they give back ITC. It was eliminated with the Tax Reform Act of 86, TRA 86 How is TAX related to Leasing? - Leasing can be used to reduce tax liability for companies. What is ADR? - In 1972, Congress introduced Asset Depreciation Ranges, ADR. This law created hundreds of asset categories with prescribed depreciable lives. No more guessing. When did banks get into leasing? - In 1963, the OCC gave banks the go ahead to own and lease personal property allowing them to enter the equipment finance market. Describe Tax Reform Act of 1986 - Eliminated the ITC, and introduced AMT. With this reform companies began keeping two sets of books, one for accounting, one for tax. Company calculates tax liability by taking revenue less expenses and deductions and pay tax on the difference. Under Alternative minimum tax, companies pay greater of regular calculation or the AMT calculation. What was the first General Equipment Company? - US Leasing Corporation was the first General Equipment Leasing Company formed to take advantage of the tax benefits of ownership while passing the right to use the equipment and expense of maintenance to a another party. What was the purpose of FASB 13 - FASB is Financial Accounting Standards Board, formed in 1976, Statement number 13, FASB 13, set forth comprehensive guidelines for both lessor and lessee book accounting to provide uniformity to financial reporting of equipment leases.Explain the history and impact of tax credits on the industry - In 1962, congress introduced Investment tax Credits, ITC, to stimulate the economy by providing equipment purchasers a tax credit to offset their total tax liability. The credit was based on a percentage of equipment cost. When government wanted to stimulate the economy they gave ITC and when they needed funds they took ITC away. This was eliminated with TRA of 86. Summarize FASB 13 and its importance to leasing. - FASB 13 Set forth 4 criteria to classify a lease as either a CAPITAL LEASE or an OPERATING LEASE and how each is to be treated on financial statements of both lessee and lessor.