COMMERCE 3FA3 Study Guide - Midterm Guide: Leaseback, Factor Cost, Ontario Highway 407
5 Jun 2018
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Leases and Lease Types
Payments received are less than the cost of asset, so life of leases are shorter than economic life of the
asset
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Does not need to be stated on statement of financial position
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Operating leases are shorter-term partially amortized leases where lessor is responsible for insurance, taxes,
and upkeep, and are cancellable on short notice
•
Payments received are sufficient to cover cost of asset making it similar to debt financing
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Must be reported on statement of financial position
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Financial leases are longer-term fully amortized leases where lessee is responsible for upkeep, and not
cancellable without penalty
•
Contractual agreements between the lessee, the user of an asset that makes payments, and a lessor, the owner of an
asset that receives payments. Represents as transfer of use but not ownership.
This is done so that profits from the sale of an asset and revenue from lease interest payments can be
done separately by the firm
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Direct leasing is performed between two parties while captive leasing is performed between two parties with a
financing subsidiary acting on behalf of one
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Tax-oriented/true lease
Lessor is the owner for tax purposes, used when no tax credits or
depreciation deductions come with ownership
Sale and leaseback lease
Lessee receives cash selling an asset to the lessor, then leases it back
Leveraged lease
Lessee selects, values asset and makes periodic lease payments
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Lessor puts of financing, is entitled to lease payments,
title of asset, and pays interest to lenders
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Lender finance remaining and receive interest payments
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Lender has first lien on asset and may receive lease
payments
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Lender deducts principal and interest due, forwards
remaining to lessor
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Non-recourse loan meaning lender cannot turn to lessor when
defaulting
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Tax-oriented leases where the lessor borrows a substantial faction of
leased asset cost
Buildings and office space are typically leased due to the large upfront cash reserves necessary for its purchase
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Machinery, office equipment, vehicles, and computers are typically leased due to their limited lifespan
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Types of Assets Leased
CRA can disavow lease if lessee automatically acquires title to property after payment of specific amount in
rent, is made to buy property from lessor during or at termination of a lease, or has the right during expiration
to acquire the property at a price less than market value
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Tax regulations limit use of CCA tax shields and only allow CCA deductions from leasing income
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Taxes, CRA, and Leases
Cash Flows from Leasing
Lease payments are fully tax deductible with a tax shield on each lease payment, however, there is no
ownership and cannot be depreciated for tax purposes
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Tax shelters are useless when companies are losing money as they would not pay taxes
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Incremental Cash Flows
NALLessee
NALLessor
PV initial cost
Lease payments
CCA tax savings
Salvage value
Leasing
March 8, 2018
5:55 PM
Managerial Finance Page 1
Document Summary
Contractual agreements between the lessee, the user of an asset that makes payments, and a lessor, the owner of an asset that receives payments. Represents as transfer of use but not ownership. Operating leases are shorter-term partially amortized leases where lessor is responsible for insurance, taxes, and upkeep, and are cancellable on short notice. Payments received are less than the cost of asset, so life of leases are shorter than economic life of the asset. Does not need to be stated on statement of financial position. Financial leases are longer-term fully amortized leases where lessee is responsible for upkeep, and not cancellable without penalty. Payments received are sufficient to cover cost of asset making it similar to debt financing. Must be reported on statement of financial position. Tax-oriented/true lease lessor is the owner for tax purposes, used when no tax credits or depreciation deductions come with ownership.
