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What are P&P, springing and collection guarantees?

The residual value of a leased asset can be guaranteed by the lessee or a party related to the lessee or unguaranteed.  If the value of the asset and/or the financial condition of…


What are lease progress payments?

An asset’s acquisition may involve progress payments, which are payments made to the manufacturer or constructor of the asset to be leased in its predelivery phase as it is being p…


What are lease payments in advance and in arrears?

Payment in advance is a payment structure in which lease payment is due and payable at the beginning of each payment period during the lease term, primarily to protect the lessor b…


What are lease installments?

A given scheduled payment made by a lessee to a lessor of an amount of a leased asset’s acquisition cost (principal), interest and any insurance premium and other costs according t…


What are lease end-of-term, early-termination and buyout options?

An end-of-term option (ETO) is the right of the lessee in a noncancellable finance lease to purchase or continue using a leased asset at the end of the lease term as specified in t…


What are deferred taxes? How do deferred taxes occur?

Taxes due for payment in future years as a result of timing differences when different depreciation methods are used for financial reporting and tax purposes are deferred taxes.  W…


What are capital requirements for financial institutions?

Credit risk is the dominant source of risk for banks and leasing companies.  The amount of capital in relation to risk weighted assets required by regulatory authorities that finan…


What are a purchase order? What is a bill of sale?

Once the final documents for a lease transaction are prepared and executed (signed) by both the lessor and the lessee, the lease asset is generally acquired using a purchase order….


How will US GAAP accounting for leveraged leases change?

The specialized accounting currently afforded leveraged leases under US GAAP will be eliminated when the new standard on lease accounting goes into effect in 2019.  Under the new s…


How is the impairment of a lease accounted for?

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 probable that the less…


How is expected loss determined?

The quantitative factors and risk components used to determine the expected loss on a credit exposure are probability of default (PD), loss given default (LGD) and exposure at defa…


How is equipment leasing secured?

A lease is not a secured transaction and is not subject to Article 9 of the US Uniform Commercial Code (UCC).  Since the lessor of commercial goods, such as equipment, owns the goo…


How is equipment leasing classified?

There is no standard for the definition and classification of equipment.  While the White Clarke Group reports on nine segments of equipment finance in its annual US auto and asset…


How is commercial real estate categorized?

The following is one of the various way in which CRE can be categorized: Office – Central business district (CBD) and suburban office buildings; Industrial – Heavy manufacturing, l…


How is a real estate lease secured?

Residential or commercial real estate in a lease is real property and a mortgage loan to the owner of leased real estate is secured by that real estate.  With the funding of real e…


How is a defaulted lease treated?

True leases and nontax leases receive different treatment in bankruptcy.  The US Bankruptcy Code distinguishes between a true lease – in which the lessor retains legal ownership –…


How does assignment secure leasing?

Leases are assigned to lenders to facilitate the orderly and more effective enforcement of the security in the leased property.  The lessor assigns to lease funders the rights asso…


How do lessors account for leases?

For initial recognition, both US GAAP and IFRS differentiate between finance and operating leases.  US GAAP calls for a bright-line test to distinguish between capital and operatin…


How do lessors account for direct-financing and sales-type leases?

The two major differences in the accounting treatment of a direct-financing lease and a sales-type lease are the gain or loss on the sale of the asset – there is no manufacturer’s…


How do lessees classify leases under ASC 842 and IFRS 16?

Lessees are required to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets under both ASC 842 and IFRS 16.  The standards cal…


How do lessees classify leases under ASC 840 and IAS 17?

US GAAP (ASC 840) calls for capital lease classification by lessees if the lease term is equal to or greater than 75% of the asset’s economic life or the present value of the lease…


How do lessees account for leases?

For assets under operating leases, lessees recognize neither an asset nor a payment obligation on their balance sheet; instead, lease payments are recorded as expense when due.  Be…


How are leveraged leases accounted for under US GAAP?

The lessor’s liability to the third-party debt participant is offset against its lease receivables from the lessee and the lessor reports an asset only if the lease receivable is g…


How are leases taxed?

Leasing practices and classification of leases by lessors and lessees for tax purposes vary widely from country to country and depend primarily on the intended ultimate ownership o…


How are leases depreciated?

Accounting depreciation is the periodic allocation of the cost of a tangible asset over its estimated economic life and reduction of the asset’s carrying value in accordance with f…


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