- A -
Accelerated Cost
Recovery System (ACRS):
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.
Accelerated Depreciation:
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
Acknowledgment:
A formal statement by a party before a notary public to the
effect that they have executed a specific instrument or document.
Add-On:
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
Additional Insured:
A party other than a party in whose name insurance is issued
who is also protected against losses covered by such a
policy.
Advance lease payments:
One or more lease payments required to be paid to the
lessor at the beginning of the lease term. Lease structures
commonly require a nominal payment to be made at lease
signing.
Agent:
A person who has legal authority to act for and represent
another party in dealing with third parties.
Agreement:
The bargain of the parties in fact as found in their
language or by implication from other circumstances.
All-risk insurance:
This is an insurance policy that covers an insured
against loss from any peril other than those
specifically excluded by the terms of the policy.
Alternative Minimum Tax (AMT):
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.
Annual Percentage Rate (APR):
The effective interest rate over the course of a
year, taking into account compounding and other
fees.
Appraisal:
An evaluation of the value of a specific item
of property, usually as conducted by a person
with expertise about that property.
Appreciation:
The increase in value of an asset over time.
Asset:
An item of value.
Audited Financial Statements:
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."
- B
-
Balloon Payment:
A payment on a loan that is unusually
large in comparison to the other
payments on the loan. A balloon
payment is usually the final payment
on a loan.
Bargain Purchase Option:
A renewal option that will, as a
certainty, be exercised because the
consideration to be given for the
purchase is so nominal as to be
insignificant.
Basis Points:
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%.
Bill of Sale:
A written document that
evidences the transfer of
ownership of property.
Book Value:
For accounting purposes, the
value of an asset according to
depreciation schedules which
may or may not be market
value.
- C -
Capital Lease:
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.
Cash Flow:
Income inflows less
expense outflows,
including debt service,
over a specified period.
Certificate of
Delivery and
Acceptance:
A document that is
signed by the lessee to
acknowledge that the
equipment to be leased
has been delivered and
is acceptable. Many
lease agreements state
that the actual lease
term commences once the
D&A has been
signed. After the
D&A is signed, the
vendor is paid.
Certificate of
Insurance:
A statement from an
insurance company or
its agent that a
certain policy has
been written. The
certificate usually
summarizes the policy’s
coverage.
Closed-end
Lease:
A lease that does
not contain a
purchase or renewal
option, thereby
requiring the
lessee to return
the equipment to
the lessor at the
end of the initial
lease term.
Co-lessee:
An additional
lessee to the
lease. The lease
will usually
provide that the
co-lessee is
jointly and
severally liable
on the lease with
the lessee. Most
leases to
non-public
companies with
individuals who
own 20% or more
are personally
guaranteed.
Collateral:
Security,
usually
property (real,
personal, or
intangible)
pledged to
secure
performance of
an agreement.
Commercial
Lease:
A lease in
which the
lessee has
entered into
the lease
transaction
for business
or commercial
purposes;
business
lease.
Commitment
Fee:
A fee that
is required
by the
lessor at
the time
the
proposal or
commitment
is accepted
by the
lessee in
order to
lock in a
specific
lease rate
and/or
other lease
terms. A
commitment
letter is a
document
prepared by
the lessor
that
details its
commitment,
including
rate and
term to
provide
lease
financing
to the
lessee.
This
document
precedes
final
documentation
and may or
may not be
subject to
other
conditions,
such as
lessor
credit
approval,
guarantors,
collateral,
etc. This
fee is
typically
at least
$2,000 or
3% of the
asset cost.
Conditional
Sales
Contract:
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.
This
entitles
the
lessee to
the tax
benefits
of
ownership,
such as
depreciation,
but the
lessee
does not
become
the free
and clear
owner of
the asset
until all
terms and
conditions
of the
agreement
have been
satisfied.
Compiled
Financial
Statements:
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."
Consumer
Lease:
A
lease
in
which
the
lessee
has
entered
into
the
lease
transaction
for
personal,
family
or
household
purposes.
In
some
states
certain
agricultural
leases
may
be
considered
consumer
leases.
Contingent
Liabilities:
Liabilities
which
are
difficult
to
quantify,
or
which
may
or
may
not
come
to
pass,
such
as
outstanding
lawsuits.
Cost
of
Capital:
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.
Cost
Of
Goods
Sold:
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.
Coterminous:
Two
or
more
leases
that
are
related
so
that
both
will
terminate
at
the
same
date.
Current
Assets:
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.
Current
Liabilities:
The
sum
of
all
salaries,
interest,
accounts
payable
and
other
debts
due
within
one
year.
-
D
-
Depreciation:
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.
Discount
Rate:
A
certain
interest
rate
that
is
used
to
bring
a
series
of
future
cash
flows
to
their
present
value
in
order
to
state
them
in
current,
or
today’s
dollars.
The
Federal
Funds
rate
is
very
common.
-
E
-
Early
Termination:
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.
Economic
Life
of
Leased
Property:
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.
End-of-Term
Options:
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
options
include
purchasing
the
equipment,
renewing
the
lease
or
returning
the
equipment
to
the
lessor.
Options
are
sometimes
given
as
an
amendment
to
the
lease
documents
and
are
not
made
part
of
the
actual
lease
document.
Equipment
Schedule/Lease
Schedule:
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.
Equity:
An
ownership
interest
in
property
or
a
business.
Exemption
Certificate:
A
document
that
certifies
a
party
to
a
transaction
is
exempted
from
sales
or
use
tax
liability
under
certain
governmental
specified
circumstances.
-
F
-
FASB
13:
Statement
of
Financial
Accounting
Standards
No.
13
issued
by
the
Financial
Accounting
Standards
Boards.
This
statement
sets
forth
the
generally
accepted
accounting
procedures
for
lessor
and
lessee
accounting
and
financial
statement
reporting.
Fair
Market
Value:
The
value
of
a
piece
of
equipment
if
the
equipment
were
to
be
sold
in
a
transaction
determined
at
arm’s
length,
between
a
willing
buyer
and
a
willing
seller,
for
equivalent
property
and
under
similar
terms
and
conditions
Simply,
the
actual
market
value
of
the
leased
asset
at
the
time
the
lease
term
is
ended.
Fair
Market
Value
Renewal:
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.
Finance
Lease:
1).
As
most
frequently
used,
a
net
lease
which
has
as
its
purpose
the
financing
of
the
use
of
property
for
a
major
portion
of
the
property’s
useful
life.
The
term
is
typically
used
in
reference
to
leases
written
by
third-party
lessors
(see
third-party
lessors).
2).
General
term
applied
to
most
types
of
equipment
leases.
Typically,
a
finance
lease
is
a
full-payout,
non-cancelable
agreement,
and
the
lessee
is
responsible
for
maintenance,
taxes,
and
insurance.
Fixed
Purchase
Option:
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
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