Business
Leveraged Leases
Leveraged leases involve a lessee using borrowed funds, in addition to their own equity, to finance the acquisition of an asset. The lessor typically provides a portion of the funds, and the remaining amount is borrowed. This structure allows the lessee to benefit from tax advantages associated with ownership, while the lessor retains some ownership interest in the asset.
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5 Key excerpts on "Leveraged Leases"
eBook - PDF- Ahmed Riahi-Belkaoui(Author)
- 2000(Publication Date)
- Praeger(Publisher)
This is a tripartite arrange- ment whereby the lessor finances a portion of the acquisition of the asset (50 to 80 percent of the purchase price) from a lender (commercial bank), securing the loan by a mortgage of the leased property as well as by the assignment of the lease and lease payments. The leverage lease is a popular instrument for special-purpose leasing companies and partnerships of individuals in high tax brackets because of the tax benefits provided by the accelerated depreciation charges, the investment tax credit, and the interest on debt, and because of the favorable return on the equity participation by the lessor. From the point of view of the lessee, the leverage lease is similar to any other lease and, consequently, does not affect the method of valuation. 1 Leverage leasing involves at least four parties: lessee, a manufacturer (or distributor), a lessor, and a lender. Arrangements are complex, and the parties enter into the agreement primarily for tax and financial cost savings rather than convenience. The lessee is able to obtain financial leasing from the lessor at a cost lower than the usual cost of capital; the lessor, being of a high income tax bracket, gains an investment tax credit (or capital cost allowance) benefit re- sulting in reduced taxes. The lessor passes on some of this benefit to the lessee through reduced lease costs. Direct leasing, sale and leaseback, and leverage leasing are illustrated in Ex- hibit 6.1. Maintenance, Nonmaintenance, and Net Leases The assignment of responsibility for the maintenance of the asset during the life of a lease takes three forms: the maintenance lease, nonmaintenance lease, and net lease. A maintenance lease assigns responsibility for the maintenance of a leased asset's good working order to the lessor. The lessor is required to incur the maintenance and repair expenses and the local and state taxes, and to provide insurance for the leased asset.
- (Author)
- 2020(Publication Date)
- Wiley(Publisher)
533 22 INTRODUCTION Leasing has long been a popular financing option for the acquisition of business property. During the past few decades, however, the business of leasing has experienced staggering growth, and much of this volume is reported in the statements of financial position. The tremendous popularity of leasing is quite understandable, as it offers great flexibility, often coupled with a range of economic advantages over ownership. Thus, with leasing, a lessee (borrower) is typically able to obtain 100% financing, whereas under a tradi- tional credit purchase arrangement the buyer would generally have to make an initial equity investment. In many jurisdictions, a leasing arrangement offers tax benefits compared to the purchase option. The lessee is protected to an extent from the risk of obsolescence, although the lease terms will vary based on the extent to which the lessor bears this risk. For the les- sor, there will be a regular stream of lease payments, which include interests that often will be at rates above commercial lending rates, and, at the end of the lease term, usually some residual value. The IASB issued a new leases standard which supersedes the previous leases stand- ard. The previous leases standard, IAS 17, focused on identifying when a lease is eco- nomically similar to purchasing the asset being leased. When a lease was determined to be economically similar to the purchase of the asset being leased, the lease was classified as a finance lease and reported on the balance sheet. An asset was recognised to bring into account the underlying asset effectively purchased, together with the corresponding liability of the lease. All other leases were classified as operating leases and not reported on the company’s balance sheet, i.e., the expense was reported in the income statement as and when incurred.
No longer available |Learn more- Stephan Leimberg, Robert J. Doyle, Michael S. Jackson, Martin J Satinsky(Authors)
- 2019(Publication Date)
- The National Underwriter Company(Publisher)
FINANCING ASSET ACQUISITIONSCHAPTER 17INTRODUCTIONThis chapter discusses the following topics: 1. Financial leverage 2. Margin trading 3. Secured vs. unsecured debt 4. Long-term vs. short-term debt 5. Mortgage loan programs 6. Other mortgage financing alternatives 7. Refinance loans 8. Mortgage (loan) math 9. Mortgage and loan financial planning applications 10. Fixed-rate versus adjustable-rate loans 11. Determining how much home one can afford 12. LeasingPeople finance their investments to enhance their returns through the use of positive financial leverage, to increase the scale of their investments, or to purchase assets, such as real estate and business assets, that they would be unable to afford without borrowing or other financing.FINANCIAL LEVERAGELeveraging is the use of techniques that permit investors to control or benefit from an investment with a given dollar value while using less than that given dollar value of the investors’ own money. Essentially, as the name implies, it is similar to the action of a lever that permits a person to move a boulder larger than he could move with his hands alone. Leveraging permits investors to control more or larger investment assets than they could control with their own equity alone.Financial leverage is the use of borrowed funds to supplement the investor’s own dollar investment (equity) to increase the scale of investment. For example, investors can purchase stocks, bonds, and other marketable securities, real estate, business assets, and the like using some combination of the investors’ and borrowed funds. If the investment returns on the assets exceed the interest rates they pay on their loans, the investors’ returns on their equity will rise above the returns on the underlying assets, giving them what is called positive leverage. Conversely, if the returns on the assets are less than the interest rates paid on their loans, the investor’s returns will fall below the return on the underlying asset, giving them what is called reverse or negative leverage
eBook - PDF- Harold Bierman, Jr(Authors)
- 2010(Publication Date)
- World Scientific(Publisher)
Other major groups of assets that are leased are computers and other data processing devices, copiers, and specialized machinery. Lessors are frequently financial institutions with large cash flows (i.e., the insur-ance companies, banks, and finance and investment companies with large taxable incomes “requiring” tax sheltering). These institutions have a strong incentive to buy equipment and then lease it to equipment users who cannot take advan-tage of such tax benefits as accelerated depreciation because they do not have taxable income. In some cases, the plant or equipment purchased by the lessor is financed by loans made to the lessor, thereby creating a situation known as leveraged leasing. A second type of lessor is the manufacturer-lessor. These companies use leases and rental agreements as key tools in the marketing of their products, enabling them to attract customers who might not be able to finance an outright purchase. The Pros and Cons of Leasing Table 12.1 shows in summary form many of the arguments offered in favor of and against leasing. It can be seen that frequently a “pro” argument is canceled by a “con” argument, leaving the decision maker to evaluate subjectively how the factor is to be brought into the decision. We will consider the cash flows associated with the two alternatives (buy and lease) under well-defined conditions. We will compare leasing with conventional debt accompanying the buy alternative. Figure 12.1 shows the basic buy versus lease analysis. First, it must be decided whether or not the investment is acceptable. Second, the annual cost of buying the asset with borrowed funds must be compared with the annual cost of leasing. If the cost of buy and borrow is less than the cost of leasing, then the third and final step is to consider whether it is desirable to finance the investment with debt or with a mixture of debt and stock equity. Buy versus Lease 229 Table 12.2. Ten Pros and Cons of Leasing.
eBook - PDF- Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
3 Describe the accounting for leases by lessors. Three important benefits available to the lessor are (1) interest revenue, (2) tax incentives, and (3) residual value profits. Lessors are essentially renting or selling assets, and in many cases are provid- ing financing for the purchase of the asset. The lessor determines the amount of the rental, basing it on the rate of return—the implicit rate—needed to justify leasing the asset, taking into account the credit standing of the lessee, the length of the lease, and the status of the residual value (guaranteed versus unguaranteed). Classifications of leases for the lessor. A lessor may classify leases for accounting purposes as follows: (1) operating leases, (2) direct-financing leases, and (3) sales-type leases. The lessor should classify and account for an arrangement as a direct-financing lease or a sales-type lease if, at the date of the lease agreement, the lease meets one or more of the Group I criteria (as shown in Learning Objective 2 for lessees) and both of the following Group II criteria: (1) collectibility of the payments required from the lessee is reasonably predictable, and (2) no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease. The lessor classifies and accounts for all leases that fail to meet the criteria as operating leases. Lessor’s accounting for direct-financing leases. Leases that are in substance the financing of an asset purchase by a lessee require the lessor to substitute a “lease receivable” for the leased asset.
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