BU393L16 Leasing (August 9) - What This Lesson Is About >...

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1 © Copyright 2010, Alan Marshall 1 Lectures 16 & 17 Lectures 16 & 17 LEASING © Copyright 2010, Alan Marshall 2 What This Lesson Is About What This Lesson Is About > In a broad sense, leasing includes short- term rental activities we do not want to consider these > We are examining leasing as an alternative to long-term ownership. © Copyright 2010, Alan Marshall 3 Parties To A Lease Parties To A Lease > Lease: A rental agreement, generally for a significant portion of the asset’s life > Lessor: Owner of the assets & receiver of the payments > Lessee: User of the assets & payer of the payments © Copyright 2010, Alan Marshall 4 Type of Leases Type of Leases
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2 © Copyright 2010, Alan Marshall 5 Types of Leases Types of Leases > Operating Lease > Financial Lease > Sale and Leaseback > Leveraged Lease © Copyright 2010, Alan Marshall 6 Operating Operating vs vs Financial Financial OPERATING > AKA Service Lease > PV of Lease Payments < value of the asset > Lessor services & maintains > Usually short term > Cancelable FINANCIAL > AKA Capital Lease > PV of Lease Payments value of the asset > Lessee services & maintains > Usually long-term > Usually not cancelable © Copyright 2010, Alan Marshall 7 Financial Leases Financial Leases > These characteristics clearly suggest that they are a substitute for ownership > The Lessee: pays an amount roughly equal to the purchase price is responsible to service & maintenance non-payment is cause for bankruptcy. © Copyright 2010, Alan Marshall 8 Sale And Leaseback Sale And Leaseback > Original owner and user of the asset sells it to another party and immediately leases it back to continue using the asset > Chrysler did this with the landmark Chrysler Building in NYC during 1979/80 financial crisis to raise money > Also has been done for tax reasons
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3 © Copyright 2010, Alan Marshall 9 Levered Leases Levered Leases Lessee Lessor Lender Lease Payments Interest Payments Non-recourse loan • In the event of default, payments are made directly to the lender • Lender also has first lien © Copyright 2010, Alan Marshall 10 The Leasing Rulebooks The Leasing Rulebooks Accounting and Tax Treatments © Copyright 2010, Alan Marshall 11 Accounting & Leases Accounting & Leases > Before there were rules about disclosure & leases, one of the features of leases were that they were OFF-BALANCE SHEET FINANCING > There were no rules to allow analysts to know if leasing was being used as a substitute for buying and paying for the assets © Copyright 2010, Alan Marshall 12 Accounting & Leases Accounting & Leases OFF-BALANCE SHEET FINANCING: > Reduced (understated) assets increasing asset turnover & ROA > Understated liabilities overstating coverage and understating debt ratios.
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4 © Copyright 2010, Alan Marshall 13 Accounting & Leases Accounting & Leases > If a lease is a substitute for ownership, it is a CAPITAL or FINANCIAL lease > These must be reported (CICA 3065) > Presentation on Balance Sheet: Assets: PV of Lease payments Liabilities: PV of Lease payments > True picture of assets employed and financial commitments © Copyright 2010, Alan Marshall 14 Accounting & Leases
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This note was uploaded on 10/15/2011 for the course BUSINESS bu393 taught by Professor - during the Spring '11 term at Wilfred Laurier University .

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BU393L16 Leasing (August 9) - What This Lesson Is About >...

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