Accelerated Cost Recovery System (ACRS)
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The tax depreciation, or cost recovery, method for Internal Revenue Service purposes that governs all depreciable property placed in service between January 1, 1981 and December 31, 1987. Introduced by the 1981 Economic Recovery Tax Act, ACRS replaced the Asset Depreciation Range (ADR) system and was replaced itself by the Modified Accelerated Cost Recovery System (MACRS) of the 1986 Tax Reform Act.
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Accelerated Depreciation
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Any depreciation method that allows for greater deductions or charges in the earlier years of an asset's depreciable life, with charges becoming progressively smaller in each successive period. Examples of accelerated depreciation are the double declining balance and sum-of-the-years digits methods.
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Add-On
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A transaction to add related equipment to an existing lease. Typically, this term is used when the new equipment is financed using the same end of term structure as was used in the underlying transaction (e.g., Fair Market Value, $1.00 Purchase Option) and the add-on's lease term will terminate on the same date as the original transaction.
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Advance Lease Payments
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One or more lease payments paid to a leasing company at the beginning of the lease term. Leasing companies commonly require one or two monthly payment(s) to be made in advance.
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Alternative Minimum Tax (AMT):
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An alternative, separate tax calculation based on the taxpayer's regular taxable income and increased by the taxpayer's preferences for the year. Among the preferences that can increase the taxpayer's alternative minimum taxable income is the accelerated portion of depreciation. After certain exemptions and offsets, the taxpayer is required to pay the larger of the regular tax or the alternative minimum tax.
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Amortization
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For accounting or tax purposes, amortization refers to the distribution of the cost of an asset over its useful life. Alternatively, amortization can refer to the process of reducing a debt obligation through periodic level payments that include both an interest and principal portion.
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Annual Percentage Rate (APR)
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The effective interest rate over the course of a year, taking into account compounding and other fees.
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Appraisal
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An evaluation of the value of a specific item of property, usually conducted by a person with expertise with respect to such property.
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Appreciation
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The increase in value of an asset over time.
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Audited Financial Statements
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An audit is a methodical and objective examination of accounts and items that support the financial statements of the company. It requires the CPA to study the association's accounting system and evaluate the risk of misstatement from error or fraud. An audit also requires the CPA to test the books and financial records to see if they are producing reliable financial data. Unlike a review, an audit requires the CPA to vouch numbers to source documents, confirm balances or other information, trace transactions through the records. An audit is more work and provides a greater degree of assurance that the financial statements are "fairly stated in accordance with generally accepted accounting principles."
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Balloon Payment
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A payment on a lease that is large in comparison to the other payments. A balloon payment is usually the last payment on the lease.
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Bargain Purchase Option
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A lease provision allowing the lessee, at its option, to purchase the leased property at the end of the lease term for a price that is sufficiently lower than the expected fair market value of the property.
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Basis Points
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Units of 1% with each unit equal to 0.01% (1/100%). For example, "50 basis points" is equal to .5% and "200 basis points" is equal to 2%.
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Book Value
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For accounting purposes, the value of an asset according to depreciation schedules which may or may not be market value.
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Capital Lease:
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A lease that either: 1) automatic transfers title to the equipment at the end of the lease; 2) contains a bargain purchase option; 3) has a lease term greater than 75% of estimated economic life of the equipment; or 4) is structured such that the present value of the lease payments is greater than 90% of the equipment's fair market value. A Capital Lease must be treated essentially as an installment purchase for book accounting purposes. Therefore, a Capital Lease is both the borrowing of funds and the acquisition of an asset. A Capital Lease does not provide the tax advantages that an operating lease does. For more detailed information, please consult paragraph 7 of FASB 13.
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Cash & Cash Equivalents
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The value of assets that can be converted into cash immediately. Usually includes bank accounts and highly liquid, marketable investments which can be easily converted into cash, such as Treasury Bills and money market funds. Cash equivalents on balance sheets include securities (e.g., notes) that mature within 90 days.
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Certificate of Delivery and Acceptance
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A document that is signed by the lessee to acknowledge that the equipment to be leased has been delivered and is acceptable.
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Certificate of Insurance
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A statement from an insurance company or its agent that a certain policy has been written. The certificate usually summarizes the coverage of a certain policy.
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Compiled Financial Statements
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A compilation is the presentation, in the form of financial statements, of the representations of the owners or managers with no assurance made by the CPA. An accountant generally performs few, if any, procedures, and it is substantially less than a review services report. For this reason, the accountant's compilation report will include wording similar to the following: "A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them."
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Conditional Sales Contract:
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An agreement for the purchase of an asset in which the lessee is treated as the owner of the asset for federal income tax purposes (thereby being entitled to the tax benefits of ownership such as depreciation), but does not become the legal owner of the asset until all the terms and conditions of the agreement have been satisfied.
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Contingent Liabilities
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Liabilities which are difficult to quantify, or which may or may not come to pass, such as outstanding lawsuits.
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Cost of Capital
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The weighted-average cost of funds that a firm secures from both debt and equity sources in order to fund its assets. The use of a firm's cost of capital is essential in making accurate capital budgeting and project investment decisions.
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Cost Of Goods Sold
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The total cost of purchasing raw materials and manufacturing finished goods. Equal to the beginning inventory plus the cost of goods purchased during some period minus the ending inventory.
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Coterminous
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Two or more leases that are related so that both will terminate at the same date.
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Current Assets
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Value of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year.
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Current Liabilities
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The sum of all salaries, interest, accounts payable and other debts due within one year.
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Depreciation
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A tax deduction representing a reasonable allowance for exhaustion, wear and tear, and obsolescence, that is taken by the owner of the equipment and by which the cost of the equipment is allocated over time. Depreciation decreases the company's balance sheet assets and is also recorded as an operating expense for each period. Various methods of depreciation can be used to alter the number of periods over which the cost is allocated and the amount expensed at each period.
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Discount Rate
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An interest rate that is used to bring a series of cash flows to their present value in order to state them in current, or today's, dollars.
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Early Termination
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The termination of a lease before the end of its original term. Depending on the lease structure, an Early Termination may have consequences such as a final payoff consisting of the sum of the remaining payments discounted at a nominal rate and a penalty.
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Economic Life of Leased Property
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The estimated period of time, with normal repairs and maintenance, that equipment is expected to be economically usable for the purpose for which it was intended at the inception of the lease.
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End-of-Term Options
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Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased equipment at the end of the lease term. Common end-of-term options include purchasing the equipment, renewing the lease or returning the equipment to the leasing company.
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Equipment Schedule/Lease Schedule
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A document incorporated by reference into a lease agreement, which describes in detail the equipment being leased. The schedule may state the lease term, commencement date, repayment schedule and location of the equipment.
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Equity
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An ownership interest in property or a business.
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Exemption Certificate
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A document that certifies a party to a transaction is exempted from sales or use tax liability under certain governmental specified circumstances.
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Fair Market Value (FMV)
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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 its own best interest.
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Fair Market Value Renewal
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A lease that includes an option for the lessee to renew the lease with the equipment value at its fair market value at the end of the lease term.
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FASB 13
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Statement number 13 of the Financial Accounting Standards Board that establishes standards for lessees' and leasing companies' accounting and reporting requirements. The provisions of FASB 13 state that a lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the acquisition of an asset by the lessee and as a sale or financing by the leasing company (a Capital Lease). Other leases should be accounted for as the rental of property (Operating Leases).
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Finance Lease
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A lease used to finance the purchase of equipment and therefore not a true lease. Finance leases are generally considered to be capital leases from an accounting perspective.
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Fixed Purchase Option
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An option given to the lessee to purchase the leased equipment from the leasing company 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.
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Full Payout Lease
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A lease in which the total of the lease payments covers the entire cost of the equipment including financing, overhead, and a reasonable rate of return, so that there is little or no residual value.
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Gross Profit
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Pre-tax net sales (gross sales minus returns, discounts, and allowances) minus cost of goods sold.
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Guaranty
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A guaranty is an agreement that is signed by the officers or principals of the company to answer for the debt or obligation of another if that other party or subsidiary company fails to pay or perform. A parent guaranty refers to those agreed to by companies, while a personal guaranty refers to those agreed to by principals or officers of a company.
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Incremental Borrowing Rate
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The rate that, at the inception of the lease, the lessee would have incurred if it had borrowed funds over a similar term to purchase the leased asset.
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Landlord/Mortgagee Waiver
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A document wherein a landlord or mortgagee acknowledges that certain leased property on the premises is owned by a third party (the leasing company) and is leased to the tenant. In the waiver, the landlord or mortgagee agrees to not interfere with the leasing company's rights respecting the leased property.
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Lease Agreement
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A contract through which an owner of equipment (the leasing company) conveys the right to use its equipment to another party (the lessee) for a specified period of time (the lease term) for specified periodic rental payments.
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