Leasing Info & Help
Asset Finance
Accumulated Depreciation
The total depreciation charges for an asset since acquisition.
Advance Payments
One or more payments required to be paid to the lessor at the commencement of the lease. Also used in the context of lease
payments that are due at the beginning of each payment period, e.g. monthly payments payable 'monthly in advance'. The
alternative to payments in advance is 'payments in arrears', i.e. at the end of each payment period.
Asset Management
The timely and proper maintenance, location tracking and disposal of leased assets.
Balancing Allowance
Tax terminology for the adjustment made to the asset pool balance for a loss on disposition of a single 'depooled' asset.
In the case of a pool of many assets then a Balancing Allowance may only be given when the whole trade ceases.
Balancing Charge
Tax terminology for the adjustment made to the asset pool balance for a gain on disposition of a single depooled asset.
In the case of a pool of many assets then a Balancing Charge occurs if the disposal gains during an accounting period
exceed the balance of unrelieved expenditure remaining in the pool.
Big Ticket Lease
A lease transaction for a very large amount; at least £20m would be a typical minimum.
Co-terminous
Used when equipment has been added to a lease and the additional rentals have been calculated so as to end by the end of
the existing Contract Period.
Cost of Funds
The interest rate at which the funder can borrow.
Cross-Border Lease
A lease where the lessor is in one country while the lessee is in another.
Deminimis Leasing
UK Treasury definition of finance leasing transactions, applied to the Local Authority leasing market, which qualify as
operating leases for accounting purposes where maximum rental exposure to a single Lessor does not exceed £10,000
Depreciation
A means for a firm to recover the cost of a purchased asset, over time, through periodic deductions or offsets against income.
Depreciation is used in both a financial reporting and tax context. In the UK depreciation appears in the accounts only, while
tax depreciation is computed separately using a system of Capital Allowances.
Discount Rate
The interest rate applied to all the remaining rentals due after the termination date of a lease in order to arrive at a
Termination Sum.
Drawdown
The moment when the lessor 'draws' money from its account to pay the supplier for the equipment to be leased. The lessor will
not normally pay for equipment unless the lessee has signed an Acceptance Certificate.
Early Termination
If the lessee wishes to exit from a lease before the end of its primary (i.e. non-cancellable) term then the lessor may agree
provided that the lessee pays a Termination Sum based on the remaining unpaid rentals, and returns the equipment.
Economic Life of an Asset
The estimated period during which the asset is expected to be economically usable by one or more users, with normal repairs
and maintenance.
End-of-term Options
Options in the lease agreement governing the treatment of leased assets at the end of the lease term. Common end-of-term
options include sale of the equipment, renewing the lease, or returning the equipment to the lessor.
Equipment Schedule
A document referenced in the lease agreement that describes in detail the assets being leased.
Extension Rental
The rental for which the lessee may continue to use the equipment for a further specified period once the primary term of the
lease has expired.
Fair Market Value
The value of an asset if it were to be sold in an arms-length transaction between a willing buyer and a willing seller.
Finance Lease
From a financial reporting perspective, a lease that meets certain criteria established by the accounting rule-making
body (SSAP21 and FRS5 in the UK). Such a lease has the characteristics of a purchase, and is required to be shown as an
asset and a related obligation on the balance sheet of the lessee.
FLA
The Finance and Leasing Association whose members represent some 80% of the UK leasing market.
FRS5
Financial Reporting Standard 5 - Reporting the Substance of Transactions, covers Substance over Form issues when reporting
transactions in financial accounts.
Full Payout Lease
A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of
return, without any reliance upon the leased equipment's future residual value.
Group Relief
The tax mechanism in the UK by which unrelieved tax benefits can be surrendered to the company's immediate or ultimate
holding company.
Guaranteed Residual Value
A guarantee from a party other than the lessor that the leased equipment will be worth a pre-determined sum at the end of the lease.
Hire Purchase
This type of transaction, sometimes referred to as Lease Purchase or Money-over-Money Lease, is a conditional sales contract in
the guise of a lease, in which the lessee is, or will become, the owner of the leased equipment by the end of the lease term, and,
therefore, is entitled to the tax benefits of ownership. Similar to a finance lease in structure except that the lessee has a
bargain purchase option at the end of the primary term (typically £1) in which the lessee is treated as the owner of the asset
for tax purposes (and is entitled to the tax benefits of ownership, such as capital allowances). The lessee does not become the l
egal owner of the asset until all terms and conditions of the agreement have been satisfied.
Interim Rental
A rent charged for the use of equipment for which the lease has not yet commenced but has been delivered and is ready to use. In
the case of a full payout lease the lessor has little justification for charging Interim Rental (also known as 'stub rental') unless
it has already paid for the equipment and is incurring interest carrying charges.
Internal Rate of Return (IRR)
The precise interest rate that discounts a given rental stream to exactly the cost of investment.
Lease Broker/Packager
A party that provides one or more services in the lease transaction, but that does not retain the lease transaction for its own
portfolio. Such services include finding the lessee, working with the equipment manufacturer, securing debt financing for the
lessor to use in purchasing the equipment and locating the ultimate lessor in the lease transaction. The lease broker also can
be referred to as a packager.
Lease Term or Period
The fixed duration of the lease in its main or primary period of lease.
Lessee
The user of the equipment being leased.
Lessor
The owner of equipment or a party who has rights to leasing to a lessee or user.
Manufacturer's Buyback
A guarantee from the equipment manufacturer to the lessor to buy back the equipment at a pre-agreed price at a set future point
in time.
Market price of Equipment
The price for which equipment in its present condition could be sold in an arm's length sale on the open market between a willing
buyer and a willing seller.
Market rental
The rental at which equipment in its present condition could be rented out in an arm's length transaction on the open market
from a willing lessor to a willing lessee.
Master Lease Agreement
A lease agreement that contains all the main or boiler plate provisions governing leasing between two parties without referring
to specific assets or financial terms, which are encapsulated in separate Lease Contracts still subject to the terms in the
Master Lease Agreement.
Middle Ticket Lease
A lease transaction typically in the range £100k-£20m.
Off Balance Sheet Financing
Any form of financing, such as an operating lease, that, for financial reporting purposes, is not required to be reported on a
firm's balance sheet.
Operating Lease
From a financial reporting perspective, a lease that has the characteristics of a usage agreement and also meets certain
criteria established by the accounting rule-making body (SSAP21 and FRS5 in the UK). Such a lease need not be shown on the
balance sheet of the lessee. Usually the lessor has taken a significant residual position in the lease pricing and,
therefore, must salvage the equipment for a certain value at the end of the lease term in order to earn its rate of return.
Purchase Option
An option in the lease agreement that allows the lessee to purchase the leased equipment at the end of the lease tem for
either a fixed amount or at the future fair market value of the leased equipment.
Renewal Option
An option in the lease agreement that allows the lessee to extend the lease term for an additional period beyond the
expiration of the initial lease term, in exchange for lease renewal payments. Also referred to as a lease extension, or
secondary period.
Residual Value
The shortfall in lease rentals that the lessor must recover from the sale of the equipment at the end of the lease.
Residual Value
The amount the lessor expects to receive from the sale of leased equipment when it is returned at the end of the lease period.
Any shortfall is for the risk of the lessor.
Residual Value Guarantee
See Guaranteed Residual Value.
Sale and Leaseback
Where the party selling the equipment to the lessor is also entering into a subsequent lease to gain the continued usage of the
same equipment - a common device by which companies raise cash.
Small Ticket Lease
A lease transaction in the range £1000-£100,000.
SSAP21
Statement of Accounting Practice No.21, along with its various amendments and interpretations, combined with FRS5, specifies the
proper classification, accounting and reporting of leases by lessors and lessees.
Tax Variation Clause
A type of indemnification in which the lessee commits to reimburse the lessor for any financial loss incurred through the
loss of, or inability to claim, any or all of the anticipated tax benefits assumed in the original lease calculation.
Tax Written Down Value
The original cost of an asset plus other capitalized acquisition costs, less any capital allowances taken.
Upgrade
The replacement of part of an item of equipment or configuration that makes up one homogenous item of equipment e.g.
PC and printer, in order to enhance its performance or useful life.
Vanilla lease
The simplest and most straightforward form of lease.
Yield
The rate of return to the lessor in a lease.
