Professional Documents
Culture Documents
CORPORATE FINANCE
Laurence Booth • W. Sean Cleary
Chapter 16 – Leasing
Prepared by
Ken Hartviksen
CHAPTER 16
Leasing
Lecture Agenda
• Learning Objectives
• Important Terms
• Leasing Arrangements
• Accounting for Leases
• Evaluating the Lease Decision
• Motivation for Leasing
• Summary and Conclusions
– Concept Review Questions
CHAPTER 16 – Leasing 16 - 3
Learning Objectives
CHAPTER 16 – Leasing 16 - 4
Important Chapter Terms
CHAPTER 16 – Leasing 16 - 5
Introduction to Leasing Arrangements
Leasing
Leasing Arrangements
Introduction
CHAPTER 16 – Leasing 16 - 7
Leasing Arrangements
The Institutional Framework
CHAPTER 16 – Leasing 16 - 8
Lease
What is it?
CHAPTER 16 – Leasing 16 - 9
Types of Leases
Leasing
Leasing
Types of Leases
Operating Lease
• A lease where some of the benefits of ownership do not
transfer to the lessee and remain with the lessor.
(See Table 16 -1 on the following slide for the distinguishing features between
the two types of leases)
CHAPTER 16 – Leasing 16 - 11
Types of Leases
Operating versus Financial Leases
OPERATING FINANCIAL
CHAPTER 16 – Leasing 16 - 12
Conditional Sales Agreement
What is it? CRA Perspective
CHAPTER 16 – Leasing 16 - 13
Financial/Capital/Full Payout Lease
What is it? Accounting Perspective
• Require the lessee to carry out maintenance and insure the asset
• Provides the lessee with a fixed purchase option
• The lease agreement covers 75% of the economic life of the asset
• Is structured so that the present value of lease payments exceeds
90 % of the cost
• Involves fixed rental payments.
CHAPTER 16 – Leasing 16 - 14
Operating Lease
What is it? Accounting Perspective
CHAPTER 16 – Leasing 16 - 15
Sale and Leaseback Agreement
What is it?
SLBs can mean that part of the tax savings can be transferred
back to the seller in the form of lower lease payments, reducing
the cost of the asset.
CHAPTER 16 – Leasing 16 - 16
Leveraged Lease
What is it?
Leases
Accounting for Leases
Accounting for Leases
CHAPTER 16 – Leasing 16 - 19
Accounting for Leases
Financial Statement Effects of Lease Classification
CHAPTER 16 – Leasing 16 - 20
Accounting for Leases
Financial Statement Effects of Lease Classification
Operating Leases:
Income Effects
1. Net income will generally be higher for operating leases in the
early years and lower in the later years because interest
expense charged for the financial lease declines as the liability
is amortized by the lease payments.
2. CFO will be lower with operating leases since the full lease
payment is subtracted from CFO, unlike financial leases where
only the interest portion of the payments is subtracted.
Balance Sheet Effects
1. Higher current ratios, lower debt and leverage ratios, higher
asset turnover and higher profitability ratios (especially in the
early years of asset life)
CHAPTER 16 – Leasing 16 - 21
Evaluating the Lease Decision
Leasing
Evaluating the Lease Decision
Lease Versus Buy
CHAPTER 16 – Leasing 16 - 23
Evaluating the Lease Decision
Lease Versus Buy Evaluative Frameworks
CHAPTER 16 – Leasing 16 - 24
Evaluating the Lease Decision
Lease Versus Buy Evaluative Frameworks
CHAPTER 16 – Leasing 16 - 25
Motivations for Lease Financing
Leasing
Motivation for Leasing
CHAPTER 16 – Leasing 16 - 28
Concept Review Questions
Leasing
Concept Review Question 1
Operating versus Capital Leases
CHAPTER 16 – Leasing 16 - 30
Copyright
Copyright © 2007 John Wiley & Sons
Canada, Ltd. All rights reserved.
Reproduction or translation of this work
beyond that permitted by Access Copyright
(the Canadian copyright licensing agency) is
unlawful. Requests for further information
should be addressed to the Permissions
Department, John Wiley & Sons Canada, Ltd.
The purchaser may make back-up copies for
his or her own use only and not for
distribution or resale. The author and the
publisher assume no responsibility for errors,
omissions, or damages caused by the use of
these files or programs or from the use of the
information contained herein.
CHAPTER 16 – Leasing 16 - 31