Leasing
Chapter 21 - Leasing
PowerPoint Notes * 21.1 Types of Leases * The Basics * A lease is a contractual agreement between a lessee and lessor. * The lessor owns the asset and for a fee allows the lessee to use the asset. * Buying versus Leasing
* Operating Leases * Usually not fully amortized * Usually require the lessor to maintain and insure the asset * Lessee enjoys a cancellation option * Financial Leases * Essentially opposite of an operating lease. * Do not provide for maintenance or service by the lessor. * Financial leases are fully amortized. * The lessee usually has a right to renew the lease at expiry. * Generally, financial leases cannot be cancelled. * Sale and Lease-Back * A particular type of financial lease * Occurs when a company sells an asset it already owns to another firm and immediately leases it from them. * Two sets of cash flows occur: * The lessee receives cash today from the sale. * The lessee agrees to make periodic lease payments, thereby retaining the use of the asset. * Leveraged Leases * A leveraged lease is another type of financial lease. * A three-sided arrangement between the lessee, the lessor, and lenders: * The lessor owns the asset and for a fee allows the lessee to use the asset. * The lessor borrows to partially finance the asset. * The lenders typically use a nonrecourse loan. This means that the lessor is not obligated to the lender in case of a default by the lessee.
* 21.2 Accounting and Leasing * In the old days, leases led to off-balance-sheet financing. * Today, leases are either classified as capital leases or operating leases. * Operating leases do not appear on the balance sheet. * Capital leases appear on
PowerPoint Notes * 21.1 Types of Leases * The Basics * A lease is a contractual agreement between a lessee and lessor. * The lessor owns the asset and for a fee allows the lessee to use the asset. * Buying versus Leasing
* Operating Leases * Usually not fully amortized * Usually require the lessor to maintain and insure the asset * Lessee enjoys a cancellation option * Financial Leases * Essentially opposite of an operating lease. * Do not provide for maintenance or service by the lessor. * Financial leases are fully amortized. * The lessee usually has a right to renew the lease at expiry. * Generally, financial leases cannot be cancelled. * Sale and Lease-Back * A particular type of financial lease * Occurs when a company sells an asset it already owns to another firm and immediately leases it from them. * Two sets of cash flows occur: * The lessee receives cash today from the sale. * The lessee agrees to make periodic lease payments, thereby retaining the use of the asset. * Leveraged Leases * A leveraged lease is another type of financial lease. * A three-sided arrangement between the lessee, the lessor, and lenders: * The lessor owns the asset and for a fee allows the lessee to use the asset. * The lessor borrows to partially finance the asset. * The lenders typically use a nonrecourse loan. This means that the lessor is not obligated to the lender in case of a default by the lessee.
* 21.2 Accounting and Leasing * In the old days, leases led to off-balance-sheet financing. * Today, leases are either classified as capital leases or operating leases. * Operating leases do not appear on the balance sheet. * Capital leases appear on