| Bargain Purchase Option |
| An option given to the lessee to purchase his/her
leased equipment at a price that is less than the expected fair market value so that, at
the inception of the lease, it is reasonable to assume that the lessee will definitely
purchase the equipment on the option date. |
Top of Page |
| Capital Lease (Finance
Lease) |
A lease that meets one or more of the criteria
outlined in paragraph 7 of FASB 13 and, therefore, must be treated essentially as a loan
for book accounting purposes. The four criteria are:
 | Title passes automatically at the end of the lease term |
| Lease contains a bargain purchase option (i.e. less than the fair
market value) |
| Lease term is greater than 75% of estimated economic life of the
equipment |
| Present value of lease payments is greater than 90% of the
equipment’s fair market value |
A capital lease is treated by the lessee as both the borrowing of
funds and the acquisition of an asset to be depreciated; thus the lease is recorded on the
lessee’s balance sheet as an asset and corresponding liability (lease payable).
Periodic lessee expenses consist of interest on the debt and depreciation of the asset.
Typical capital leases contain a bargain purchase option (e.g. $1) that
can be exercised at the end of the lease term. |
Top of Page |
| Certificate of Acceptance |
| A document that indicates the lessee’s acceptance
of the equipment and begins the base term of the lease. |
Top of Page |
| Estimated Useful Life |
| The period during which an asset is expected to be
useful in trade or business. |
Top of Page |
| Fair Market Value (FMV) |
| The price for which property can be sold in an
"arms length" transaction; that is, between informed, unrelated, and willing
parties each of which is acting rationally and in his/her own best interest. |
Top of Page |
| Fair Market Purchase Option |
| An option given to the lessee to purchase the leased
equipment from the lessor at its fair market value at the expiration of the lease term. |
Top of Page |
| Fixed Purchase Option |
| An option given to the lessee to purchase the leased
equipment form the lessor on the option date for a guaranteed price. Both the date and the
price must be determined at the inception of the lease. A typical fixed purchase option is
10% of the original cost of the equipment. |
Top of Page |
| Lease |
| A contract through which an owner of equipment, the
lessor, conveys the right to use its equipment to another party, the lessee, for a
specified period of time and for specified periodic payments. |
Top of Page |
| Lease Schedule |
| A schedule to a Master Lease agreement describing the
leased equipment, rentals and other terms applicable to that equipment. |
Top of Page |
| Lease Term |
| The fixed, non-cancelable term of the lease. |
Top of Page |
| Lessee |
| The party to a lease agreement who has been given the
right to use the equipment for the lease term by the party who has legal or tax title to
the equipment and who is entitled to receive rental payments from the lessee. |
Top of Page |
| Lessor |
| The owner of equipment that is being leased to a
lessee or user. |
Top of Page |
| Master Lease |
| A lease line of credit that allows a lessee to add
equipment under the same basic terms and conditions without negotiation a new lease
contract. |
Top of Page |
| Municipal Lease |
| A lease designated to meet the special needs of state
and local governments. The lease contains a non-appropriation clause, which states that
the only condition under which the entity may be released from its payment obligation is
if the legislature of funding authority fails to appropriate funds. |
Top of Page |
| Off-Balance Sheet Financing |
| A lease that qualifies as an operating lease for the
lessee’s financial accounting purposes. Such leases are referred to as off-balance
sheet financing due to their exclusion from the balance sheet asset and debt presentation
except for that portion of the payments that is due in the current fiscal period. Full
disclosure of such transactions is typically made in the auditor’s notes to the
financial statements. Periodic statements are recorded as expense items on the
lessee’s income statement. |
Top of Page |
| Operating Lease |
A lease that is treated as a true lease (not a loan)
for book accounting purposes. As defined in FASB 13, an operating lease must have all of
the following characteristics:
| Lease term is less than 75% of the estimated economic life of the
equipment |
| Present value of lease payments is less than 90% of the
equipment’s fair market value |
| Lease cannot contain a bargain purchase option (i.e. less than fair
market value) |
| Ownership is retained by the lessor during and after the lease term |
An operating lease is accounted for by the lessee without showing an
asset (for the equipment) or a liability (for the lease payment obligations) on his/her
balance sheet. |
Top of Page |
| Payment in Advance |
| Periodic payments are due at the beginning of each
period. |
Top of Page |
| Payment in Arrears |
| Periodic payments are due at the end of each period. |
Top of Page |
| Purchase Option |
| An option given to the lessee to purchase the
equipment from the lessor, usually as of a specified date. |
Top of Page |
| Rate Factor |
| A percentage of the original equipment cost which,
when multiplied by that cost, determines the periodic lease payment. |
Top of Page |
| Renewal Option |
| An option to renew the lease at the end of the initial
lease term. |
Top of Page |
| Residual Value |
| The book value that the lessor depreciates a piece of
the equipment down to during the lease term. Typically, this is based on a projected
estimate of the future fair market value less some safety margin. |
Top of Page |
| True Lease |
| A lease which includes an option for the lessee to
purchase the equipment for its fair market value at the end of the lease term. |
Top of Page |
