Equipment Finance

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Accumulated Depreciation
It is the total depreciation charge for an asset since the acquisition of the equipment.

Advance Payments
It is the payments made to the lessor at the commencement of the lease. It is also used in the context of lease payments where there is a due amount at the beginning of each period, e.g. monthly payments payable 'monthly in advance'. The alternative to payments in advance is 'payments in arrears', i.e. at the end of each payment period.

Asset Management
The efficient maintenance, location tracking and disposal of leases assets.

Balancing Allowance
It is one of the tax terminologies for the adjustment made to the asset pool balance for a loss on disposition of a single 'depooled' asset. If many assets are involved in the case then Balancing Allowance can only be given when the whole trade ceases.

Balancing Charge
It is one of the tax terminologies for the adjustment made to the asset pool balance for a gain on disposition of a single depooled asset. If many assets are involved then Balancing Charge will occur only if the the disposal gains during an accounting period exceed the balance of unrelieved expenditure remaining in the pool.

Big Ticket Lease
A lease transaction for a very large amount at least £20m.

Co-terminous
This is used when the equipment has already been to a lease and additional rentals have been calculated so as to end by the end of the existing Contract Period.

Cost of Funds
The interest rate at which the funder can borrow.

Cross-Border Lease
A lease where the lessor and the lessee are in different countries.

Deminimis Leasing
UK Treasury definition of finance leasing transactions, applied to the Local Authority leasing market, which qualify as operating leases for accounting purposes where maximum rental exposure to a single Lessor does not exceed £10,000

Depreciation
Through this a firm tries to recover the cost of a purchased asset through periodic deductions or offsets against income. This term is used in both a financial reporting and tax context. In the UK depreciation appears in the accounts only, while tax depreciation is computed separately using a system of Capital Allowances.

Discount Rate
It is the interest charged against all the remaining rentals after the termination date of a lease in order to arrive at a Termination Sum.

Drawdown
It is the time when money is withdrawn from the lessor’s account to pay the supplier for the equipment to be leased. The amount is paid only when the lessee has signed an Acceptance Certificate.

Early Termination
When a lessee wants to end a lease before the termination day arrives then he has to pay a Termination Sum based on the remaining unpaid rentals and return the equipment.

Economic Life of an Asset
It is the predetermined period during which the asset is believed to be economically usable with normal repairs and maintenance.

End-of-term Options
These are the options which deal with the asset at the end of the lease term. Commonly these include sale of the equipment, renewing the lease, or returning the equipment to the lessor.

Equipment Schedule
It is the document referenced in the lease agreement describing in detail the assets being leased.

Extension Rental
It is payment required to be made if the lessee wishes to continue using the equipment after the termination date of the lease has occurred.

Fair Market Value
The actual value of an asset if it were to be sold in a transaction between a willing buyer and a willing seller.

Finance Lease
A lease meeting some terms and conditions established by the accounting rule-making body (SSAP21 and FRS5 in the UK). This type of lease can even make a purchase and is required to be shown as an asset and a related obligation on the balance sheet of the lessee.

FLA
The Finance and Leasing Association whose members represent some 80% of the UK leasing market.

FRS5
Financial Reporting Standard 5 - Reporting the Substance of Transactions, covers Substance over Form issues when reporting transactions in financial accounts.

Full Payout Lease
It is a type of lease in which the lessor recover through lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.

Group Relief
The tax mechanism in the UK by which unrelieved tax benefits can be surrendered to the company's immediate or ultimate holding company.

Guaranteed Residual Value
A guarantee from a party other than the lessor that the leased equipment will be worth a pre-determined sum at the end of the lease.

Hire Purchase
This is also known in the market as Lease Purchase or Money-over-Money Lease. Actually it is one type of sales contract in which the lessee is the owner of the leased equipment by the end of the term. Thus it enables the lessee to acquire tax benefits of ownerships. It is almost like a finance lease, but here the lessee can bargain at the end of the primary term (typically £1) where he will be considered as the owner of the asset for all tax purposes. To become the owner of the asset the lessee has to fulfill all the terms and conditions of the agreement.

Interim Rental
This is charged against the lessee in case the lease has not been started but the equipment is already in use. After the lessee pays the full lease he has a little justification for charging Interim Rental unless the payment for the asset has been made.

Internal Rate of Return (IRR)
The precise interest rate that discounts a given rental stream to exactly the cost of investment.

Lease Broker/Packager
A third party who will be involved in the lease transaction, but will not contains it in his portfolio. Some of these services are finding the lessee, working with the equipment manufacturer, securing debt financing for the lessor to use in purchasing the equipment and locating the ultimate lessor in the lease transaction. They are also known as packagers.

Lease Term or Period
The fixed duration of the lease in its main or primary period of lease.

Lessee
The user of the equipment being leased.

Lessor
The owner of equipment or a party who has rights to leasing to a lessee or user.

Manufacturer's Buyback
A guarantee from the equipment manufacturer to the lessor to buy back the equipment at a pre-agreed price at a set future point in time.

Market price of Equipment
It is the current price of the equipment if it is sold in between a willing buyer and a willing seller.

Market rental
It is the rental at which the equipment can be rented at present in the market from a willing lessor to a willing lessee.

Master Lease Agreement
A lease agreement that contains all the main or boiler plate provisions governing leasing between two parties without referring to specific assets or financial terms, which are encapsulated in separate Lease Contracts still subject to the terms in the Master Lease Agreement.

Middle Ticket Lease
A lease transaction typically in the range £100k-£20m.

Off Balance Sheet Financing
These are transactions which need not be reported on a firm’s balance sheet.

Operating Lease
It is a type of lease which is similar to usage agreement and also abides by some terms established by the accounting rule-making body (SSAP21 and FRS5 in the UK). It’s not required to be shown on the balance sheet. Normally lessor pays a significant amount of the lease pricing and therefore must salvage the equipment for a certain value at the end.

Purchase Option
Through this option the lessee can purchase the equipment at the end of the term for a fixed amount or at the future fair market value of the equipment.

Renewal Option
Through this option the lessee can extend the lease term for an additional period after the termination date expires. But he has to pay renewal charges.

Residual Value
The shortfall in lease rentals that the lessor must recover from the sale of the equipment at the end of the lease.

Residual Value
The amount the lessor expects to receive from the sale of leased equipment when it is returned at the end of the lease period. Any shortfall is for the risk of the lessor.

Residual Value Guarantee
See Guaranteed Residual Value.

Sale and Leaseback
Through this a party can sell equipments to a lessor, but can also avail portions of the subsequent leases on the equipments. It is a very common usage to raise more cash.

Small Ticket Lease
A lease transaction in the range £1000-£100,000.

SSAP21
Statement of Accounting Practice No.21, along with its various amendments and interpretations, combined with FRS5, specifies the proper classification, accounting and reporting of leases by lessors and lessees.

Tax Variation Clause
A type of indemnification in which the lessee commits to reimburse the lessor for any financial loss incurred through the loss of, or inability to claim, any or all of the anticipated tax benefits assumed in the original lease calculation.

Tax Written Down Value
The original cost of an asset plus other capitalized acquisition costs, less any capital allowances taken.

Upgrade
Replacement of a part of an equipment or configuration that will make another homogenous equipment e.g. PC and printer in order to increase the usability.

Vanilla lease
The simplest and most straightforward form of lease.

Yield
The rate of return to the lessor in a lease.