PORTFOLIO

Leases: Lessor Perspective — Economics (Portfolio 5120)

BNA Tax and Accounting Portfolio 5120-2nd, Leases: Lessor Perspective—Economics (Accounting Policy and Practice Series), explains and analyzes the economics of leasing from the lessor's perspective.

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DESCRIPTION

BNA Tax and Accounting Portfolio 5120-2nd, Leases: Lessor Perspective—Economics (Accounting Policy and Practice Series), explains and analyzes the economics of leasing from the lessor's perspective. The Portfolio discusses the leasing industry, the lessor's motivations for leasing and the economic and financial reporting perspectives of leasing. The Portfolio also describes the types of lessors most common in the market, including captive lessors, independent lessors, and bank lessors.
The Portfolio analyzes pricing methodologies as they apply to lessors and provides definitions and discussion of the relevant economic indicators. It discusses pricing and economics as specifically applied to single-investor leases and leveraged leases. The Portfolio also discusses several of the most common yield analysis methodologies and yield types in the leasing market.
The fourth in an anticipated subseries of portfolios on accounting for leases, this work augments APP 5114, Accounting for Leases: Fundamental Principles; APP 5117, Leases: Lessee Perspective; APP 5118, Leases: Lessee Perspective—Selected Topics; APP 5128, Leases: Lessor Perspective—Classification; and APP 5129, Leases, Lessor Perspective—Recording the Lease.
The FASB and the International Accounting Standards Board (IASB) are collaborating to revise and converge their standards on Accounting for Leases. This Portfolio will be updated as necessary to reflect any new rules or principles. For a summary of the most recently proposed rules and their potential impact on lessor accounting, see APP 5114, Accounting for Leases: Fundamental Principles at Section I.D.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5120-2nd, Sebik and Starczewski, Leases: Lessor Perspective—Economics (Accounting Policy and Practice Series).


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AUTHORS

JOSEPH P. SEBIK, C.P.A.
Joseph P. Sebik, B.A., Accounting, Queens College of the City University of New York (1977); graduate credits towards MBA, Controllership, St. Johns University; Certified Public Accountant, New York State (1980); member of the Accounting Committee of the Equipment Leasing Association (ELA) since 2000; member AICPA. Mr. Sebik is a recurring speaker at ELA Accounting Conferences and has authored numerous articles on leasing. He has over 20 years of lease accounting and financial reporting experience with Price Waterhouse, IBM Credit Corporation, Citicorp Global Equipment Finance, and JPMorgan Capital. Mr. Sebik has co-authored several Accounting Policy and Practice Portfolios, including BNA Tax and Accounting Portfolio 5114, Accounting for Leases: Fundamental Principles; 5117, Leases: Lessee Perspective; and 5118, Leases: Lessee Perspective—Selected Topics.

LISA MARIE STARCZEWSKI, ESQ.
Lisa Marie Starczewski, J.D. (summa cum laude), Villanova University School of Law; B.A. (magna cum laude), Smith College. Ms. Starczewski served as Editor-in-Chief of the Villanova Law Review (1987–88) and is a member of adjunct faculty at Villanova University School of Law. She practiced law with Morgan, Lewis & Bockius, and Schnader, Harrison, Segal & Lewis. Ms. Starczewski has co-authored a number of Accounting Policy and Practice Portfolios, including BNA Tax and Accounting Portfolio 5100, Revenue Recognition: Fundamental Principles; 5101, Revenue Recognition: Product Sales and Services; 5114, Accounting for Leases: Fundamental Principles; 5117, Leases: Lessee Perspective; and 5118, Leases: Lessee Perspective—Selected Topics. She has also authored numerous Tax Management Portfolios (also published by BNA), including 714 T.M., Partnerships—Allocation of Liabilities; Basis Rules; 565 T.M., Installment Sales; 752 T.M., Corporate Alternative Minimum Tax; 587 T.M., Noncorporate Alternative Minimum Tax; 503 T.M., Deductions: Overview and Conceptual Aspects; and 504 T.M., Deduction Limitations: General. She has received the Tax Management Distinguished Author Award and is a member of the Tax Management U.S. Income Advisory Board.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction and Scope of Portfolio

A. The Leasing Industry

1. Background

2. Lessors and Points of Revenue

B. Reasons for Leasing From the Lessor's Perspective

1. Facilitate Product Sales

2. Shelter Taxable Income

3. Provide Additional Financing Products for Existing Clients

4. Provide Full Service Leasing

C. Scope of Portfolio

II. Types of Lessors

A. Background

B. Financial-Oriented Lessors Compared to Full Service Operating Lessors

1. Financial-Oriented Lessors

2. Full-Service Operating Lessors

3. Comparison of Financial-Oriented and Full-Service Operating Lessors

C. Captive Lease and Finance Companies

1. In General

a. Accounting of a Captive

b. Benefits of a Captive Financing Subsidiary

c. Detriments of a Captive Financing Subsidiary

2. Captive Intercompany Relationship Challenges

a. Intercompany Tax Issues

b. Requirement for Enhanced Intercompany Reporting

c. Intercompany Cash Management and Cost of Funds

d. Actions for the Benefit of the Subsidiary or Parent?

e. Risk of Engaging in Unfair Business Practices

f. Market Signals Broadcast by Captive

3. Examples of Captives

a. Computer Manufacturer Captives

b. General Industrial Manufacturer Captives

c. Heavy Equipment Manufacturers

d. Truck and Tractor Manufacturers

e. Automobile Finance and Leasing Companies

4. Captive Lessor Economics

a. In General

b. Indicative Operating Statistics of Captives

(1) Percentage of Parent Sales Financed

(2) Comparison of Captive's and Parent's Debt-to-Equity Ratio

(3) Captive's Versus Parent's Long-Term Debt

(4) Contribution to Earnings of the Consolidated Entity

(5) Earnings Measurement Criteria

c. Types of Leases and Financings

d. Economics of a Tax Lease Versus Sale

5. Vendor-Leasing Programs

D. Financial Institution Lessors

E. Independent Lessors

III. Loan Versus Lease

A. General Comparison

B. Basic Accounting Differences-Loan Versus Lease

IV. The Economics of Leasing-Lessors

A. Introduction

B. Forms of Investment

1. Background and Categories

2. Form and Structure of Funding

a. Single-Investor Leases

b. Leveraged Leases

3. Tax Orientation of the Lease

a. Tax Versus Non-Tax Oriented Lease

b. Forms of Tax Leases

(1) Lease of Non-Motor Vehicle Asset

(2) TRAC Lease

(3) Tax-Leveraged Lease

c. Forms of Non-Tax Leases

(1) Synthetic Leases

(2) Tax-Exempt Leases

4. Lessor Accounting Treatment

a. Operating Leases

b. Direct-Financing Leases

c. Leveraged Lease

(1) Classification

(2) Balance Sheet Treatment

C. Pricing Sensitivity of Lease Structures and Components

D. Leasing Industry Capital Markets

E. Pricing Methodologies

1. Background

2. Loan Pricing

a. In General

b. The Loan Market

c. Loan Costing

3. Why a Lease Is Priced Differently Than a Loan

4. Economic Components of a Non-Tax Lease

5. Non-Tax Lease Pricing

a. Loan Equivalent Rate

b. Additional Lease Related Factors

c. Example of Cost of Lending Calculation

6. Tax-Oriented Lease Pricing

7. Yield Analysis and Measurement Criteria

a. Selecting a Yield Measurement Methodology

b. Overview of Yield Analysis Methodologies

(1) Lease Pricing Models

(2) Use of a Sinking Fund in Lease Pricing

c. Yield Analysis Methodologies

d. Selected Yield Types and Explanations

(1) Treatment of Cash Flows From Tax Benefits

(2) Multiple Investment Sinking Fund

(3) Return on Investment

(4) Return on Equity

(a) ROE-Book Example

(b) ROE-Cash Example

(5) Return on Assets

(6) Internal Rate of Return

(7) Realized Compound Yield

(8) Risk-Adjusted Return on Capital

(9) Shareholder Value Add / Economic Value Add

(10) Book Accounting Yield

e. Comparison of Different Yields From the Same Lease

f. Effect of Leverage on Yields

8. Reporting System Adjustments

9. Lease Pricing Models

10. Indexing of Cost of Funds

F. Economics of a Like-Kind Exchange

1. Definition of LKE

2. LKE Tax Rules

3. Economic Benefits to Lessor

4. Comprehensive Example of a LKE

5. Economic Results of LKE

6. Issues Related to Depreciation Calculation

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Questions and Answers Regarding Leases: Lessor Perspective-Economics

Worksheet 2 U.S. Lessor Segments by Asset Values (Monitor 100 Survey)

Worksheet 3 New Business Volume by Equipment Type-Percentage of Total Annual Volume (2007 ELFA U.S. Equipment Market Survey)

Worksheet 4 Illustration of Tax Lease Cash Flows

Worksheet 5 Extract From IBM Corporation 2007 Annual Report Regarding IBM Global Financing

Worksheet 6 Comparative Analysis of Key Statistics of Captive Finance Companies

Worksheet 7 IBM Corporation Presentation on Return on Invested Capital for 2007

Worksheet 8 Extract From Beckman Coulter 2007 Form 10-K, Item 7

Worksheet 9 Captive Lessor Tax Lease Yield Analysis

Worksheet 10 New Business Volume by Origination Channel (2007 ELFA U.S. Equipment Market Survey)

Worksheet 11 New Business Volume by Financial Product Category (2007 ELFA U.S. Equipment Market Survey)

Worksheet 12 New Business Volume by Financial Product Category and by Type of Organization (2007 ELFA U.S. Equipment Market Survey)

Worksheet 13 Sample Indicative Bond Spreads (Reuters)

Worksheet 14 Financial Ratios by Type of Organization (2007 ELFA U.S. Equipment Market Survey)

Worksheet 15 Extract From Wachovia Corporation 2007 Annual Report, Key Performance Measurements-RAROC

Worksheet 16 Extract From JPMorgan Chase Bank 2007 Annual Report, Regulatory Capital Summary

Worksheet 17 InfoAnalysis Proof of Yield Report-Multiple Investment Sinking Fund Yield

Worksheet 18 InfoAnalysis Proof of Yield Report-Return on Investment

Worksheet 19 InfoAnalysis Proof of Yield Report-Return on Equity/Book

Worksheet 20 InfoAnalysis Proof of Yield Report-Return on Equity/Cash

Worksheet 21 InfoAnalysis Proof of Yield Report-Return on Assets

Worksheet 22 InfoAnalysis Proof of Yield Report-Internal Rate of Return

Worksheet 23 InfoAnalysis Proof of Yield Report-Realized Compound Yield

Worksheet 24 Navistar Financial Press Release Regarding Sale of Asset-Backed Notes

Bibliography

OFFICIAL

Internal Revenue Code

Code of Federal Regulations

Cases

Internal Revenue Service

Financial Accounting Standards Board

FASB Statements

FASB Interpretations

FASB Technical Bulletins

FASB Emerging Issues Taskforce

International Accounting Standards Board Statements

UNOFFICIAL

Books, Articles, Speeches, and Letters

BNA Portfolios

Corporate Reports

Web Sites