February 8, 2016 ...The FASB on Leasing and Lease Reporting

I have yet to see a definitive publication on lease reporting coming from the FASB (Financial Accounting Standards Board) explaining the new but not yet implemented accounting rules. That is, a written dissertation on this is how you do it (also serving as a codification) may not yet be available. I think it is safe to say that leveraged leasing is dead for the foreseeable future. I have read that it was pretty much dead for the past few years anyway. If there was any question about it's health, the general opting to treat a leveraged lease as a finance lease essentially kills all hope of it's use in the future. As a straight financing transaction on paper, the EPS impact would be negative or weak at best, the real economics of the transaction not withstanding. The general trend of corporations not paying any taxes via other shelters and techniques probably had as much to do with the demise of the leveraged lease as anything else. When you can just off-shore the income and avoid all taxes, at least for the immediate future, why bother with tax shelters. Jesse James did not need any tax shelters. Someone should do a new book on modern tax sheltering techniques for Internationals. Maybe Bernie Madof could write something while he is doing his time? By the by, FASB, the technique of putting off implementation amounts to avoidance behavior, which is not the mark of good leadership.

The economics of tax sheltered leases of equipment still requires measurement via some sinking fund method enhanced yield approach to measure an after tax rate, if rate is to be used as one of the measuring tools. Systems that are able to do that will be harder to find. PAMDCF still provides sinking fund analysis of transactions including one sound method, the Standard Sinking Fund Method to do rate analysis when after tax analysis is sought, and equivalent pre-tax rates are sought. Using EXCEL as it's data base provides the flexibility to introduce any computed tax benefits to the flows and using the SSFM to establish a sinking fund provides a mathematically and logically sound approach to handing the sign change issues that create multiple yield problems. As an example, the SSFM model could be used to determine how much investors would have to invest up front to assure a business would succeed where it's projections cause sign changes over the projected period. Nothing to do with leasing, but the same concept as a leveraged lease. As long as there remains gaping holes in the tax code that permit Multi-nationals to avoid taxes entirely, who needs any tax shelters? Maybe some of theses pillars of independence running for election can fix things? Right!

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 .

Here is a brief discussion long promised on advance vs arrears payments.

Advance or Arrears Payments:

Typically, payment of interest for the use of money is made at the end of the period of use of the money.  As an example, most mortgages are paid at the end of the month for the use of money during that month.  Similarly, the principal portion of the payment is made together with the interest after the month expires or in "arrears". In some cases, loans or lease payments  are made having payments in the beginning  or the inception of the loan or lease before the lapse of any time in the contract. This loan would be referred to as having an "in advance" payment structure. So, what's the difference in rate effect and cash flow? Why is it done?

The change between advance and arrears  can have a major impact on the rate of interest in the loan or lease. Some loans or leases can require two or more payments in advance, or other in advance payments for fees etc.  The impact of any "in advance" payments for any reason by whatever they may be called, is to reduce the amount of initial investment by an amount equal to the in advance payments. Making the initial investment for the same loan/lease smaller while the pay back stream remains the same increases rate of return. The smaller the investment the higher the rate of return on the investment, all other things being equal. There is an endless list of fees and expenses a lender can charge or pass on to the borrower. Whatever the name, if the borrower pays over to the lender some amount, that amount serves to enhance the lenders yield or rate on the deal.

Assume a  business loan of $95,000 to be paid back monthly over  18 months with a rate of interest at 18% and an in arrears payment of $6,061.55. The stream rate is given as 18% and could be quoted as such.

If the lender were to require one payment in advance then the amount being loaned would reduce to (95,000-6061.55) or 88,938.45. The resulting rate to present value the stream of payment back to 88,938.45 is 26.95%,

If the lender required the 1st two in advance the rate jumps to 36.84%. The stream rate can still be said to be 18% while the actual rate is 36.84%.

If the lender required the 1st plus the last two payment in advance we get  95,000-(3 X 6061.55)) or an net investment of  76,815.35.  The rate increases to 47.85% with three in advance. The stream rate is still quoted as 18% while the effective rate has jumped to 47.85%. Wow...big difference.

Next let's assume a placement fee is charged, or call it a set up fee of 3% or 3,135 (.03 X 95,000). The net out of pocket to the lender drops from 76,815.35 to 73,680.35. The rate now goes to 54.06%.

So we have the first and last two in advance and a set up fee of 3%. We quote 18% on the stream and create a transaction returning  54.06% effective rate. That is what "in advance vs. in arrears" can do to the bottom line. The borrower needs the money and is often thankful that he has a resource at any rate, so he is willing to pay it even if he is aware of the material increase in rate created by in advance payment requirements. Many a small business would not survive without this resource. Banking requirements are unrealistically restrictive, and poorly executed. Too much emphasis on rate will often mislead a borrower.

These rates can be developed using a financial calculator. Having PAMS-DCF software to produce amortization schedules gives a better picture of the earnings spread over the term.   This concludes our discussion of in advance in arrears scenarios.