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Why is the recovery rate of bank loans higher than that of bonds?

Lenders have a comparative advantage over bondholders in recovering their claims.  There are factors that tend to result in higher expected recoveries of loans over bonds, includin...


Who are the key parties to a securitization?

The securitization process involves numerous parties in specialized roles for the creation and issuance of asset-backed securities.  Besides the ABS buyers – investors, for securit...


When is a leased asset impaired? How is lease impairment recognized?

An impairment is a permanent reduction in the carrying value of an asset below its fair value (US GAAP) or recoverable amount (IFRS), which occurs when it is deemed improbable that...


When is a distressed firm restructured?

A restructuring operates primarily on the liabilities side of the debtor’s balance sheet by postponing liabilities and using the time gained to readjust the claims against the firm...


What ratios are used in lease underwriting?

Lease underwriting credit analysis includes financial ratios to assess the transaction collateral credit quality.  Whereas equipment lease credit criteria are commonly limited to l...


What leases qualify as leveraged leases under US GAAP?

Leveraged leases have a separate accounting classification under US GAAP; IFRS does not have the concept of leveraged leases.  Under US GAAP, a leveraged lease qualifies as an oper...


What leases are structured as nontax leases?

Operating leases for accounting purposes can be structured as nontax leases to allow the lessee to take advantage of the tax benefits of asset ownership while having off-balance sh...


What leases are structure as true leases?

Leases in the upper middle-ticket segment and big-ticket leases are also generally structure as true leases.  The ability of lessors to claim the tax benefits of ownership is a key...


What kind of equipment is leased?

The BEA lists the following types of equipment in its publication “Relation of Private Fixed Investment in Equipment in the Fixed Assets Accounts to the Corresponding Items in the...


What is vendor leasing?

Vendor leasing is equipment lease financing offered by vendors through bank, captive and independent lessors to the end-user of assets in conjunction with the sale of their product...


What is US GAAP?

US Generally Accepted Accounting Principles (US GAAP) are the overall conventions, rules and procedures that define accepted accounting and financial reporting practice to be follo...


What is the US GAAP CECL Model?

In June 2016, the FASB introduced the expected credit loss model (CECL model) to become effective on 1 January 2020 for public business entities that are Securities and Exchange Co...


What is the true sale of a lease?

A true sale is the outright, irrevocable nonrecourse sale of assets to a third party, whereby the assets and all their rights are irrevocably (absolutely) transferred from the sell...


What is the ticket size of retail equipment leasing?

Micro-ticket equipment is a classification used by the ELFA of equipment costing up to $25,000, involving the leasing of such high-volume relatively low-price assets as office equi...


What is the statement of changes in equity?

The statement of changes in equity is a financial statement that reports all changes to a company’s owners’ equity over an accounting period, including total comprehensive income,...


What is the statement of cash flows?

The statement of cash flows is a financial statement that reports the flow of cash into and out of a company in a given year resulting from the entity’s operating, financing and in...


What is the residual value of a lease? What is the salvage value of a lease?

The commercial value of a leased asset under a finance lease at lease termination as set at lease inception equal to the estimated net proceeds from the asset’s sale, its remarketi...


What is the present value of a lease?

US GAAP and IFRS accounting for leases and lease pricing are based on the fair value of the leased assets and the expected cash flows.  The current value of one or a series of disc...


What is the lease rate?

The lease rate is the periodic payment made by the lessee to the lessor for the use of an asset in a lease transaction expressed either as the annual percentage rate (APR) or a lea...


What is the income statement?

The income statement is a financial statement that reports the results of an entity’s business activities for an accounting period by showing its revenues, expenses, gains and loss...


What is the IFRS expected credit loss (ECL) model?

Under IFRS 9, debt instruments, excluding purchased or originated credit impaired financial instruments, move through three stages as credit quality changes after initial recogniti...


What is the expected loss on leases?

Expected loss (EL) is the amount of a credit exposure that a creditor (lender, lessor) can expect to lose in the event of default on a credit exposure equal to the exposure less th...


What is the effective interest-rate method to amortize leases?

A technique for calculating and amortizing the cost of a financial instrument by allocating the interest revenue or expense at a constant periodic rate over its life is the effecti...


What is the cash conversion cycle?

The cash conversion cycle (CCC) is the cycle from the conversion of cash into inventory, from inventory into accounts receivable, and then back into cash: Days Inventory Outstandin...


What is the allowance for loan and lease losses (ALLL)?

That portion of outstanding loans and leases that is deemed to be uncollectible is charged off and reported as an allowance for loan and lease losses at the end of the accounting p...


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