Operating versus Capital Lease Financing
Companies often choose to lease long term-assets rather than purchase for different reasons - the tax benefits are usually greater to the lessor than the lessees, leases provide more flexibility and helps hedge against obsolescence. Lease payments generate the same kind of obligation that interest payments on borrowed funds create, and need to be viewed the same way. Often times, a perusal of a firm's financial statements can provide a misleading view of a firm's financial strength. In an effort to correct this, accounting rules require disclosure of lease obligations on the company's books.
Historical Background of Leasing
It is difficult to tell when the actual first leasing transaction occurred. Evidence seem to suggest that sometime before 2000 BC leasing was part of Sumeria's culture. Civilizations, such as, Phoenicians, Greeks, Romans and Egyptians used leasing as an alternative method of financing equipment, land and livestock.
The practice of leasing was used and carried on throughout the following centuries right through the 1800s resulting in the industrial revolution getting a major boost from leasing. As technology increased in developing nations leasing has been a viable alternative to financing equipment not only in the Western World but even throughout the United Kingdom.
Original Equipment Manufacturers have for the past 4000 years used leasing as a way to increase sales and hedge against obsolescence because it is an affordable option to acquire equipment.
As we progress forward into the 21st century leasing will continue to be an invaluable option to acquire equipment. However, a new proposed model for lease accounting can have a significant impact on hospitals and healthcare organizations. The new approach proposes a “right-of-use” model that involves complex estimates and significant administrative burden. Hospitals and health systems that draw heavily on lease arrangements would be wise to start preparing for the new approach.
How Lease Rates Are Calculated
As Determined by Equipment Lessors
The lease rate factor is used by equipment lessors as a means of determining interest payments, using a simple formula of interest rate divided by 24. The result is a quick way to calculate any changes in the leasing agreement. A few simple steps will help you calculate lease rate factor and apply it to leasing information to determine monthly payments. What is the Fair Market Value of the equipment at the end of the lease term? In order to calculate this you must know the Manufacturers Suggested Retail Price (MSRP) of the equipment and multiply it by the residual value. For example: If a forklift MSRP is $56,000 and the expected residual value at the end of 5 year lease is 22 percent then the residual value is $12,320.
Now, calculate the equipment value that will be used during the lease term. Subtract this value by the MSRP. Using the above example, the end value of the forklift ($12,320) subtracted from the MSRP ($56,000) yields a value of $43,680. Read More