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The Leasing glossary contains definitions, background information and valuable facts and figures about leasing and financing.
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The lessor usually activates the investment object. Thus, the investment does not affect the lessee’s balance sheet, i.e., neither the investment good nor the liabilities are accounted for. The equity ratio and the level of indebtness do not change. Current leasing expenses are accounted for in the profit-and-loss statement. Leasing obligations are shown in the attachment to annual statements.
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An international committee of bank regulatory authorities and central banks works in Basel, Switzerland, on new regulations for equity capital requirements for banks. The regulatory committees have the task to make sure that capital requirements for banks with regard to lending are more dependent on the individual risk. Up to now, 8% equity capital was necessary for loans; in the future this percentage will depend on the individual risk (more or less equity capital).For bank customers this means that their individual loan risk is determined by their credit rating which also influences their financing costs. Leasing improves the economic good relations for the lessee, which can have a positive influence on the rating. Leasing companies are not subject to the regulations of Basel II. The new equity capital regulations are expected to be legally binding as of 2006.
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Cash flow is an economic indicator showing all of a company’s liquid assets produced in an accounting period. In simple words, the Cash-Flow consists of the profit plus depreciation plus/minus reserves. Cash-Flow is an important variable to measure a company’s ability to pay back debt as well as its internal financing.
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The lessee and the supplier agree on deposits due before delivery and the start of the lease agreement. The leasing company may make these payments on behalf of the lessee within the framework of a contract. The interest for deposits (prefinancing) will be calculated at the start of the lease agreement and charged to the lessee’s account. If the lessee makes the payment on his own behalf, he acquires expectancy of ownership. In connection with a lease agreement the expectancy will be transferred to the leasing company, so that the leasing company may acquire ownership at all. The leasing company, the lessee, and the supplier agree that the lessee’s deposit is regarded as having been made by the leasing company.
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End of the leasing contract Each lease agreement ends with the return of the object to the leasing company. Before the end of an agreement the Parties discuss whether the agreement should be extended for the continued use of the object, or if the object should be sold to the lessee or a Third Party.There are lease agreements with a fixed end-of-lease term or with automatic extension, which do not require further negotiations.
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In connection with a leasing object, fungibility means the usability of an investment good by third party. A leasing object is therefore not fungible if it can be used by only one specific user. The lessor therefore is only the economic owner of an object if a fungible economic good is involved.
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The IAS/IFRS (International Accounting Standards/International Financial Reporting Standards) are the European equivalent of the US American accounting regulations, US-GAAP. IAS/IFRS regulations are currently being enhanced. Meanwhile it was decided that all publicly owned firms within the EU must prepare their annual statements according to IAS/IFRS standards beginning with January 1, 2005. Countries outside the EU are also developing national accounting regulations according to IAS/IFRS standards. Due to the fact that the standards have yet to be finalized, it is not certain if annual statements prepared according to IAS/IFRS standards are recognized by the New York Stock Exchange. Therefore, internationally operating German groups currently prepare their annual statements according to US-GAAP standards. It remains to be seen which one of the two accounting regulations will be more important, or if there will be some sort of harmonization between these two regulations. IAS/IFRS standards comprise check criteria, according to which it is determined whether leasing investments should be accounted for on the lessor’s or the lessee’s side.
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In most planned leasing investments the customer (future lessee) will order the economic good from the supplier. After conclusion of a lease agreement the lessor enters the customer’s order. After the supplier’s invoice is paid by the lessor, ownership of the economic good is transferred from the supplier to the lessor.
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Numerous regional and national promotion programs exist in Hungary, which grant investment subsidies under certain conditions especially to the medium-sized business. Owing to different conditions it is necessary to check whether the respective program facilitates the promotion of leasing investments. If ascribing the economic good with the user is necessary for fulfilling the prerequisites for promotion, then the financial leasing / loan agreements are made.
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In Germany leasing means the grant of use of an investment good for a certain period for money within the framework of a special agreement. A typical characteristic of the “product” leasing is that it almost always involves three parties. The customer = lessee, the supplier = manufacturer/salesperson, and the lessor.
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The lease agreement is an agreement between the lessee and the lessor and regulates all business modalities. Several agreement models are possible. The most important parts of the agreements are the amount of the lease rate, the term of the agreement, as well as payment modalities.
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Leasing of movable goods are leasing investments for movable investment goods, which are also called equipment investments. This includes operational appliances and immaterial assets (such as software).
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Leasing object is the economic good invested with a lease agreement. All objects, which can be used as independent economic goods and which are fungible, can be leased.
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The leasing rate is the payment the lessee must make on a monthly or a quarterly basis for the use of an economic good. Together with the rate and possible residual values or special payments the largest share of the lessor’s investment costs are amortized. The basis for the calculation of leasing rates is the purchase price, the term of the agreement, and the conditions on the capital market. The credit rating and the maintenance of value of the object influence the calculation as well. Leasing payments are – in a fiscal sense – operational expenses, which immediately influence the profit-and-loss statement.
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The lessee can be an individual or a legal entity. Within the framework of the lease agreement the lessor (leasing company) grants to the lessee the use of an object for money for a certain duration of time.
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The lessor is the leasing company. Most leasing companies are subsidiaries or partner companies of banks. Furthermore, bank independent corporations and manufacturer leasing companies operate on the market.
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Machine insurance (technical insurance) Machine insurance covers damage to movable and stationary equipment, such as construction, construction material, printing, plastics, and tool machinery. It also covers the following property damage: Fire, lightning, storm and hail, frost and ice, operational mistakes, being unskilled, negligence, water, oil and grease defects, failure of measuring, control, and safety devices, rupture due to centrifugal force, excess pressure or low pressure, short-circuit, over current or over voltage with or without fire in electric installations, theft, burglary and robbery, vandalism. The insurance coverage protects the lessee and the lessor from considerable asset risks. Such insurance coverage is often part of a lease agreement.
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Merchandising with leasing Merchandising is sales support for the manufacturer and salesperson of equipment. That means that the product offering will be extended by a leasing offer. The investor receives all services pertaining to the investment from one source.There are many different forms of cooperation for the development of individual merchandising concepts for salespersons or manufacturers.
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The lessee bears a big share of the investment risk on the object. The selection of a suitable leasing object and a correct supplier as well as keeping and servicing the leased object also lie under his responsibility. At the end of the leasing contract the investment risk, for instance the market value risk is transferred to the lessor.
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At the conclusion of the agreement the lessee acquires the right to extend the agreement term or to purchase the object at the end of the lease term. The option price depends on the residual market value or the lowest fair value.
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Lessor and lessee conclude an outline contract for the planned leasing investments to be made in the course of a longer period (for instance 1 year). To the lessee this confirms the maximum amount up to which he can transact his investment. With an outline contract, optimum conditions for the lessee can be agreed on. The administrative scope is very low.
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Pay-as-you-earn means that the investment costs are covered by the leasing payments from the returns respectively earned. Pre-financing of the investment is thus avoided. The solvency that remains in the company can be used for other purposes – even for boosting the output.
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The residual value in lease agreements is a calculatory factor to determine the lease payments. It is the amount for which the lessee does not pay during the term of the agreement. Lease agreements with a residual value are called agreements with partial amortization. The higher the residual value the lower the lease payments. In the lessee’s interest the residual value should depend on the residual book value and on the expected market value at the end of the lease term. The lessee is liable for the residual value towards the leasing company. Based on the residual value a subsequent lease agreement can be made. The market value determined at the end of the lease term is the basis for the sale of the leasing object to a Third Party or a lessee.
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The Parties of a lease agreement may agree upon a one-time payment when the agreement is concluded. This special lease payment is an advance payment and reduces the subsequent lease rates. Special payments are arranged when the object’s value maintenance is not secure, or in order to avoid other risks. Special lease payments are accounted for as deferred expenses and accrued income on the lessee side. The write-off is linear over the term of the lease agreement. In the lessor’s annual statement it is accounted for on the liabilities side of the statement.
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US-GAAP (United States Generally Accepted Accounting Principles) are the US-American accounting regulations, according to which all public companies and US companies, including their European subsidiaries, must perform their accounting, if they are to be traded on the New York Stock Exchange. US-GAAP contains checking criteria for the accounting of lease agreements. US-GAAP differentiates between operating leasing agreements with accounting on the lessor’s side and capital lease agreements with accounting on the lessee’s side. The checking criteria contains marginal rates, such as agreement terms, cash values, and purchase options. It is recommended that a comprehensive consultation with the lessee’s accountant takes place before the conclusion of a lease agreement.
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