It's all about the balance sheet, the balance sheet, the balance sheet!
What can you say? I have concluded that requiring the recording of leases on the books of the lessee is what the new pronouncement is all about. In general, requiring the recording of legal obligations and attendant rights is what has been accomplished. To be sure, it will change the look and feel of many a balance sheet on the lessee side of the equation. That is a big deal! Not so much on the lessor side. It is more than a question of cosmetics when liabilities hit the balance sheet that were previously never shown. On the lessee side again, the operating statement is changed very little if you look at the net Profit impact. PAMS-DCF is very well suited to computing present values and amortization schedules for recorded leases. PAMS will handle complex flows and create permanent records that can be introduced into its portfolio capabilities to create a composite rate and amortization schedule for each reporting period and be easily updated as new lease transactions are added. You would have to set up a portfolio for operating leases and one for finance leases due to the differences in Profit reporting, but that is simple enough to do. We can provide one time or ongoing service and reports in both hard copy and EXCEL file formats without the need to acquire the system or learn it. We would prepare booking entries, monthly amortization and balance sheet balances, monthly amortization expenses, interest expenses, individually or in a composite portfolio format. Give us a shout and make your life a bit easier. We need the work.
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Showing posts with label Leasing. Show all posts
Showing posts with label Leasing. Show all posts
Tuesday, May 17, 2016
Friday, May 13, 2016
FASB on Feb 25, 2016 and the IASB somewhat earlier, have published and implemented their new accounting standards for leases. The FASB standard is designated LEASES(ASC 842). I have had the opportunity just this month (May 2016 ) to review some of the articles available, coming off a very hectic tax season.
To the point, just about every lease that goes beyond a year now has to show itself on the balance sheet as both an asset and offsetting liability. The leases break down into three broad categories as operating leases, finance leases and sales type leases. Leveraged lease are no longer recognized as a separate category, but presumably will squeeze themselves into the finance lease category if any are newly done. There is no advantageous earnings treatment from the lessor reporting side, nor any advantageous balance sheet treatment from the lessee side. If one is done it would have to be on it's economic merits only. After tax analysis is still a viable tool and can be applied to any leveraged tax advantaged transaction not only leases, but including leveraged leases. There is no longer an up-fronting of income and hence no great EPS impact can be expected for lessors.
It is all too new for me to start making any generalizations other than to say all leases will be outed on the balance sheets of lessees and will carry the force of contractual debt in ratio and income measurements. Present value analysis can be done for the simpler payment streams using any tool such as EXCEL or a hand held HP Financial calculator. For more complex flows and for a permanent record or portfolio computations, a system such as PAMS-DCF will be required above and apart from the rate analysis aspects of such a tool. Over-all, I believe Present Value tools will be in more demand now than ever before, in spite of the loss of the need for accounting use of extended yield analysis methods. It should prove to be a net win for products such as PAMS-DCF. More will come as the accounting package is completed and some attempts are made to implement portfolio booking methods for leases on the lessee side. It is a new world, but hey, look what's happening to the political world.
To the point, just about every lease that goes beyond a year now has to show itself on the balance sheet as both an asset and offsetting liability. The leases break down into three broad categories as operating leases, finance leases and sales type leases. Leveraged lease are no longer recognized as a separate category, but presumably will squeeze themselves into the finance lease category if any are newly done. There is no advantageous earnings treatment from the lessor reporting side, nor any advantageous balance sheet treatment from the lessee side. If one is done it would have to be on it's economic merits only. After tax analysis is still a viable tool and can be applied to any leveraged tax advantaged transaction not only leases, but including leveraged leases. There is no longer an up-fronting of income and hence no great EPS impact can be expected for lessors.
It is all too new for me to start making any generalizations other than to say all leases will be outed on the balance sheets of lessees and will carry the force of contractual debt in ratio and income measurements. Present value analysis can be done for the simpler payment streams using any tool such as EXCEL or a hand held HP Financial calculator. For more complex flows and for a permanent record or portfolio computations, a system such as PAMS-DCF will be required above and apart from the rate analysis aspects of such a tool. Over-all, I believe Present Value tools will be in more demand now than ever before, in spite of the loss of the need for accounting use of extended yield analysis methods. It should prove to be a net win for products such as PAMS-DCF. More will come as the accounting package is completed and some attempts are made to implement portfolio booking methods for leases on the lessee side. It is a new world, but hey, look what's happening to the political world.
Monday, February 8, 2016
Monday February 8, 2016-Accounting System coming soon!
We have very neatly formatted amortization schedules going to excel files directly. We are cleaning up rounding differences and should be ready to publish as part of the standard package shortly Next will be carrying the reports directly to an accounting sheet for cumulative accounting reporting of earned income , remaining unearned income and remaining principal balances. This will effectively permit both balance sheet reporting and income reporting of the key eliminates of investment receivables. We have also cleaned up readability of reports by eliminating sometimes confusing negative signs preceding some columns .
Saturday, June 20, 2015
Extended Yield Methods: Part 2 Sources of Funds
Page 2 of the Discussion Page at PAMSDCF.com
06/19/2015
Let's try to answer the first question and watch what happens. Where is the money going to come from? There are two main sources of the money, one would be from within the transaction, and the other would be from outside the initial transaction, such as a loan or additional investment. Let's look at the source from within the transaction flows first. In many instances the cash flows we are examining will have sufficient prior inflows to adequately meet the subsequent required outflows. In those cases we could set aside some of the inflowing money in sufficient amounts to meet the subsequent required outflows. The transaction will be fully self-supporting and all outflows, after the initial investment, will be expensed to the transaction by being part of the net flows. The set-aside money needed to pay out the negative periods is conceptually provided for by putting the money in an account called a sinking fund. A physical fund may not be set up. The savings may be viewed as being held by the parent company. In that case it is valued at the parent's marginal cost of borrowing (or some other agreed rate). The earnings on the fund, real or conceptual, would be the interest rate paid by the institution holding the money. If it is in a bank, then it is at some bank savings rate, if used by the parent, then it should be the parent's marginal cost of funds. The fund money can be viewed as an offset to existing debt until returned to the transaction by the parent company. The governing limits of the sinking fund are usually to put aside just enough money to meet the negative flows. Taking more money than minimally needed and placing it in a savings account will usually be detrimental to the profitability of the transaction since the transaction is presumed to be earning more than can be earned at the sinking fund institution, all other things being equal. If this is done precisely, it will have the effect of smoothing out the cash flow's swings from positive to negative and eliminate the multiple sign change issue introducing zero cash flows in some of the periods that were formerly negative. More importantly, the transaction model is now pictured and set up as a logical flow of cash that defines all of the sources of the flows, income and expenses associated with the model. Since all of the funds are from within the transaction after the initial investment, the profitability (or lack thereof), as measured by the rate of return within the flows, is all-inclusive recognizing all costs and income associated with transaction. By addressing the issue of "where does the money come from" we have solved three issues: where is it from, what is the cost, and is the rate so determined reliable and unique. For the case where the money comes from within we have solved it all. Voila! In case anyone hasn't noticed, we also explained what an "Extended Yield Analysis Method " is and why it is needed. Simply put, it is needed to present a logical, all inclusive, verifiable and complete flow model and develop a unique and implicit rate from an otherwise incomplete, illogical arbitrary multiple rate potential flow scenario.
(to be continued)
06/19/2015
The answer to the question "who cares" is " everyone should care".
Firstly, if a flow fails Descartes' rule of signs test it will be because
contained in the flows are negative outflows after the first initial investment
outflow. That is what causes the sign changes of the rolling forward totals.
The first question that should come to mind is "Where will these negative subsequent flows come
from? " The second question is what cost, if any, should
be introduced to the analysis and how will it be introduced.
Let's try to answer the first question and watch what happens. Where is the money going to come from? There are two main sources of the money, one would be from within the transaction, and the other would be from outside the initial transaction, such as a loan or additional investment. Let's look at the source from within the transaction flows first. In many instances the cash flows we are examining will have sufficient prior inflows to adequately meet the subsequent required outflows. In those cases we could set aside some of the inflowing money in sufficient amounts to meet the subsequent required outflows. The transaction will be fully self-supporting and all outflows, after the initial investment, will be expensed to the transaction by being part of the net flows. The set-aside money needed to pay out the negative periods is conceptually provided for by putting the money in an account called a sinking fund. A physical fund may not be set up. The savings may be viewed as being held by the parent company. In that case it is valued at the parent's marginal cost of borrowing (or some other agreed rate). The earnings on the fund, real or conceptual, would be the interest rate paid by the institution holding the money. If it is in a bank, then it is at some bank savings rate, if used by the parent, then it should be the parent's marginal cost of funds. The fund money can be viewed as an offset to existing debt until returned to the transaction by the parent company. The governing limits of the sinking fund are usually to put aside just enough money to meet the negative flows. Taking more money than minimally needed and placing it in a savings account will usually be detrimental to the profitability of the transaction since the transaction is presumed to be earning more than can be earned at the sinking fund institution, all other things being equal. If this is done precisely, it will have the effect of smoothing out the cash flow's swings from positive to negative and eliminate the multiple sign change issue introducing zero cash flows in some of the periods that were formerly negative. More importantly, the transaction model is now pictured and set up as a logical flow of cash that defines all of the sources of the flows, income and expenses associated with the model. Since all of the funds are from within the transaction after the initial investment, the profitability (or lack thereof), as measured by the rate of return within the flows, is all-inclusive recognizing all costs and income associated with transaction. By addressing the issue of "where does the money come from" we have solved three issues: where is it from, what is the cost, and is the rate so determined reliable and unique. For the case where the money comes from within we have solved it all. Voila! In case anyone hasn't noticed, we also explained what an "Extended Yield Analysis Method " is and why it is needed. Simply put, it is needed to present a logical, all inclusive, verifiable and complete flow model and develop a unique and implicit rate from an otherwise incomplete, illogical arbitrary multiple rate potential flow scenario.
Thursday, June 18, 2015
Extended Yield Methods: Introduction
What are Extended Yield Analysis Methods ?Introduction Part 1:
06/13/2015
One of PAMS-DCF's goals was to introduce a new way of learning about Discounted Cash Flow Analysis that provided a hands on approach using sophisticated yield analysis software that here- to- fore was available only to the big guys on the block. This forum will discuss definitions and issues of various topics, many of which are covered by the glossary contained in our book. I'd like to start by discussing the mathematical principals that are required in the use of DCF. We intend to keep the discussion in strictly laymen's terms. Our first goal is to explain the geniuses of "Extended Yield Methods" and why they are needed.
DCF (discounted cash flow ) analysis uses various formulas in computing Present Values and Future Values , payment amounts and terms depending on the given information. Some of theses formulas in mathematics' jargon are generally referred to as Polynomials. They are equations that have certain attributes common to all in their class and they behave in a fixed and determinable way across their entire spectrum. There are certain rules that should always be tested for when dealing with this class of equations known as or called Polynomials. We don't really care what the attributes are or what most of the rules are for theses equations, but (and there is always a "but") there is one rule that does effect DCF analysis that we must learn to deal with in order to avoid making some very serious miscalculations. We don't have to learn the proof of this rule, or why it is always true. The appendix of our book covers a proof and extended discussion, but you had better be a mathematician of sorts to follow it. We simply have to learn how to test for cash flows that have the potential of breaking this rule and do something to reestablish the rule's principal in the flows we are examining.
Some of you are already familiar with the name Descartes. He was a great mathematician of the 18th century. He demonstrated that when dealing with equations in the class of "polynomials" in general, (here as they are applied to cash flows), certain conditions arise that allow us to have multiple positive rates that will discount to zero (NPV=0). Obviously, Descartes was not doing DCF problems when he formulated this principle. It applies to all polynomials including those representing cash flows. The rule he discovered was that if there is more than one sign change in the polynomial's terms (which in DCF are determined by the flows which starts out negative, otherwise there is no investment), then there is a potential for, but not necessarily always, more than one positive solution that will resolve the polynomial equation to zero. Putting this statement differently, if there is only one sign change in the rolling total, then there is only one rate that will resolve to a zero NPV. This rate is unique or it can be said to be "inherent" in the cash flows.
So who cares? If we have five different sign changes in the rolling total of the flows and potentially five different positive rates that will resolve to a zero present value, then let's just pick one that we like and use it to distribute the income over the term of the deal on that rate basis (interest basis). After all the total earnings remains the same (total interest income) at the end of the day, only the timing of income changes as the rate changes.
It is noted that in the leasing arena much is changing, however, whatever the outcome, the financial analysis of the transaction's economics will always require a comprehensive understanding of Discounted Cash Flow Analysis. That being said, when reference is made to FASB 13, it should be understood that it may be a legacy document in many respects going forward, particularly in the lessor leveraged lease area. As PAMS-DCF uses an extended yield method called MISFM which should never have been adopted in the first place, and will have no good reason to remain other than to do review type work with, it will be referred to as "MISFM Legacy".
(to be continued)
(Completed through page 2)
06/13/2015
One of PAMS-DCF's goals was to introduce a new way of learning about Discounted Cash Flow Analysis that provided a hands on approach using sophisticated yield analysis software that here- to- fore was available only to the big guys on the block. This forum will discuss definitions and issues of various topics, many of which are covered by the glossary contained in our book. I'd like to start by discussing the mathematical principals that are required in the use of DCF. We intend to keep the discussion in strictly laymen's terms. Our first goal is to explain the geniuses of "Extended Yield Methods" and why they are needed.
DCF (discounted cash flow ) analysis uses various formulas in computing Present Values and Future Values , payment amounts and terms depending on the given information. Some of theses formulas in mathematics' jargon are generally referred to as Polynomials. They are equations that have certain attributes common to all in their class and they behave in a fixed and determinable way across their entire spectrum. There are certain rules that should always be tested for when dealing with this class of equations known as or called Polynomials. We don't really care what the attributes are or what most of the rules are for theses equations, but (and there is always a "but") there is one rule that does effect DCF analysis that we must learn to deal with in order to avoid making some very serious miscalculations. We don't have to learn the proof of this rule, or why it is always true. The appendix of our book covers a proof and extended discussion, but you had better be a mathematician of sorts to follow it. We simply have to learn how to test for cash flows that have the potential of breaking this rule and do something to reestablish the rule's principal in the flows we are examining.
Some of you are already familiar with the name Descartes. He was a great mathematician of the 18th century. He demonstrated that when dealing with equations in the class of "polynomials" in general, (here as they are applied to cash flows), certain conditions arise that allow us to have multiple positive rates that will discount to zero (NPV=0). Obviously, Descartes was not doing DCF problems when he formulated this principle. It applies to all polynomials including those representing cash flows. The rule he discovered was that if there is more than one sign change in the polynomial's terms (which in DCF are determined by the flows which starts out negative, otherwise there is no investment), then there is a potential for, but not necessarily always, more than one positive solution that will resolve the polynomial equation to zero. Putting this statement differently, if there is only one sign change in the rolling total, then there is only one rate that will resolve to a zero NPV. This rate is unique or it can be said to be "inherent" in the cash flows.
So who cares? If we have five different sign changes in the rolling total of the flows and potentially five different positive rates that will resolve to a zero present value, then let's just pick one that we like and use it to distribute the income over the term of the deal on that rate basis (interest basis). After all the total earnings remains the same (total interest income) at the end of the day, only the timing of income changes as the rate changes.
It is noted that in the leasing arena much is changing, however, whatever the outcome, the financial analysis of the transaction's economics will always require a comprehensive understanding of Discounted Cash Flow Analysis. That being said, when reference is made to FASB 13, it should be understood that it may be a legacy document in many respects going forward, particularly in the lessor leveraged lease area. As PAMS-DCF uses an extended yield method called MISFM which should never have been adopted in the first place, and will have no good reason to remain other than to do review type work with, it will be referred to as "MISFM Legacy".
(to be continued)
(Completed through page 2)
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