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Thursday, December 3, 2015

Thursday Dec 3, 2015
Our EXCEL listed amortization capability (vs hard copy paper) is nearing availability and will be incorporated into PAMS-DCF as a standard (not separate) feature.. This will permit easy customization of the presentation of amortization reports and easy transfer into other systems. It is being developed as part of the larger accounting capability function. It will also permit individuals to develop their own accounting systems custom fitted to their needs  assuming they are trained in EXCEL. Wow! Talk about power and versatility!  See our Website for updates.

Monday, September 28, 2015

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.
As of today, we ate still struggling with our Publisher to get our book properly listed on Amazon. It is listed, there is a picture of the book, however, the peek inside the book sample pages feature, the about the author blurb,  and some of the book title's layout remains missing or incorrect. We are goin into week 4 with this struggle. Come on guys...give us a break!

Friday, September 4, 2015

Apparently the FASB is getting close to a publication on US lease accounting. If you visit  and go to the articles section (see the top navigation bar) and read the "Lease Accounting Project Update" article by Bill Bosco you will get a pretty good overview of what is happening. You can comment on the article as it is never too late to influence the Board.

We are in the process of listing our book on AMAZON, BLURB and other book retailers. We look forward to seeing this accomplished.

Book Description:
PAMS-DCF explains in detail starting from basic concepts, what "Discounted Cash Flow Analysis" is, why it is needed, and what its pitfalls are. It discusses and supports with examples the various issues surrounding yield analysis, including leveraged lease analysis, multiple yield scenarios, extended yield methods, and the concepts and methods used in portfolio summary yield techniques. It is a walk through the temples of high finance from a mathematical standpoint. PAMS-DCF (see WWW.PAMSDCF.COM) was written to accompany a software system that is available separately. As a stand-alone book the codifying and clarification of concepts is uniquely enlightening.The book contains many examples and reports, a glossary and a complete outline and index.The appendix for those interested, delves in detail into the mathematical issues of multiple rate scenarios.The book alone is an outstanding learning tool.The book and software together provide an affordable, powerful and easily mastered business tool. An eye-opening must-read book for anyone considering a career in finance, leasing, economics, business or banking.

Cost $ 29.95

On another note, we have broken ground on an Excel based accounting system that will permit cash, income and balance sheet reporting of a portfolio. Excel offers a virtual database functionality that lends itself to small and intermediate size companies in lending and leasing. We are looking at a six month development horizon hopefully.

Friday, August 14, 2015

Thursday August 13, 2015.
We demonstrated the system in the NY area at two locations.  We returned to home base yesterday. After considerable thought, we have concluded that  our book should be listed as a stand alone item on AMAZON for a modest price. It involves the loss of some control over the book's circulation, but we are of the belief that the benefits outweigh the risks. We are planning to offer the book alone at $29.95. The book is a walk through from beginner to expert in the area of Discounted Cash Flow Analysis and includes a comprehensive glossary. It is easy to read and very empowering for those new to the art. Full credit will be given for the purchase price of the book should the software be purchased at some latter date.

Saturday, July 25, 2015

We were working on a portfolio scenario with some very good results from our yield engine. We introduced management expenses that went well beyond the end of  the majority of transactions and found the SSFM (Standard Sinking fund Method) handled the flows nicely by setting up a needed sinking fund. We hope to benign a direct contact campaign shortly. looking forward to talking to some of you.

Friday, July 17, 2015

Thanks God it's Friday! I would love to hear from some of the readers around the world that have been reading our "Shop Talk" discussions. I was thinking of having a brief talk about advance and arrears payments and how they impact yield. Not a lot of meat there but something worth looking at using PAMS-DCF generated examples. Does anyone have some area they would like us to explore with some examples and models? Let's hear from you. No question is too trivial if it is distracting you, and I realize that most do not have (yet) access to a discounted cash flow software system to help you answer questions. We do, so give us the opportunity to put it to good use. Off to see my "Buds" and down a wine or two at our local pub and Jazz club. It is Friday night! Music is my other great passion.

Wednesday, July 15, 2015


It has occurred to us that in our shop talk about extended yield methods, we did not point out the fact that under the traditional sinking fund method or Standard Sinking Fund Method as it is alternatively called, earnings are reported on a much more even basis for all years over the entire life of the transaction (see Exhibits A,B,C -3). That fact when combined with all the other virtues of the traditional method  seems to make it a prime candidate for consideration as a method for reporting lessor leveraged lease interest income. It has the virtue of preserving the after tax considerations of leveraged lease accounting and helps provide the impetus (though not as great due to the loss of up fronting income on early years EPS) to continue doing leveraged leases should the tax appetites and/or market ever return for what ever reason(s). Where the FASB is going to land is anybody's guess! Retaining the MISFM-Legacy is certainly an option, though an unwieldy one, to be sure. I must repeat what I said on my blog  earlier on referring to the MISFM-Legacy...."Born of Ignorance, lived in Glory and should die in ignominy". Perhaps having up fronted all the income in leveraged deals done "back in the day" has helped lead some companies to consider leaving the business for more fertile grounds as what is left in income can't support the carrying costs. Does anyone have any companies in mind? The ole matching costs against revenues issue is rearing it's ugly head. What goes around, comes around! .........Just saying.

Thursday, July 9, 2015

We now have a clearly defined mission. It follows:

Doing DCF analysis without access to a computerized system is impossible given our life spans. The use of a capable, versatile, easily and quickly manipulated computerized system is absolutely necessary. PAMS-DCF is just such a system thanks in part to the choice of EXCEL as its database,  which most people have and are familiar with. Excel, when coupled to the front-end input software and powerful yield analysis engine make an unprecedented combination for dealing with DCF analysis.

PAMS-DCF is a tool that is affordable and easily learned and should be as basic to the tool box of every financial industry person and financial educator as a hammer is to a carpenter.

 We at PAMS-DCF Inc. intend to see to it that everyone can afford to have access to this tool and the knowledge to use it,  that is our Mission.   
07/9/2015     A picture is worth 1K words....Part 5 Final on Extended Yield Methods

                    "WILL THE REAL YIELD PLEASE STAND UP!"
At this date, it looks very much like the MISFM-Legacy may not survive expected changes in accounting rules now close to a decision. Be that as it may, The MISFM-Legacy remains a good example of what good discounted cash flow techniques should not be. We will continue to use it as a model of what not to do even if it survives. I will refer to the MISFM as MISF-Legacy to denote the issues surrounding its' continued use.

We can start by looking at the first picture, a picture of the MISF-Legacy  method's investment amortization schedule or proof of yield report. This is the report that shows the source of the rate used by FASB13 of 8.647% and all the related tables associated with computing that rate. We can call that Exhibit A-2.  It is conspicuously absent from Appendix E of FASB13. It is difficult to explain an issue if the foundational schedule supporting the computations is not presented.  FASB13 failed to present this schedule as best as we can tell after reviewing Appendix E. Along with the MISFM amortization schedule we are presenting the other two schedules PAMS-DCF produces on all cash flows, The IRR (XX-1)schedule and the SSFM (XX-3) schedule. So each different cash flow will always be analyzed 3 different ways. By doing this 3 way approach (A-1, A-2, A-3, etc.) we will have comparative analysis and we will be prompted to ask pertinent questions.
The first observation to be made is that the raw, un-extended or unmodified flows discount to a PV of zero at a rate of 9.257543% (IRR Schedule A-1), hence this rate can be added to a bucket of "Pick Your Rate" options  that discount to zero It is a mathematical  solution to a series of flows that discounts to a zero PV(present value) . This begins to  demonstrates that a rate can generally be found for any cash flow that will discount to zero mathematically  The flow does not meet the Sign test criteria of only one change in rolling flows. There are 3 changes. This should not stop us from using it since the MISFM-Legacy modified flow does not meet the sign test  either. That is the flow that gives rise to the 8.647% yield  that we are using to distribute income. So by any logical measure, the raw flow used in the IRR analysis and the modified flow used in the MISFM analysis should have equal standing before the court, at least as far as the sign test  for a unique rate or yield existing is concerned.
Let's look at the original FASB13 MISFM-Legacy schedule that was never presented in the publication. This is represented by  Exhibit A-2. It uses an algorithm or routine wherein it starts by picking a test rate,  Discounts the flows to the point where the inflows plus interest at the rate being tested recoup the initial investment and the interest computed. It then transfers to a fund the remaining cash flows or portions thereof until it encounters outflows that are then paid from the sinking fund( the transferred money) until the sinking fund is used up. Thereafter, any outflows encountered are deemed by the rules of the algorithm set somewhere in the universe to come from new investment or multiple investments with no cost or time value associated with them for prior years. So we have a scheme that uses a sinking fund created on the basis of some logic associated with positive and negative investment periods, (the negative investment period is when the investment is eradicated by the payback and the positive investment period is when the out flowing funds turn the  PV back to a negative number again on which interest is earned). Other terminology used in describing this somewhat convoluted reasoning includes asset and liability phases of the investment. The rate of 8.647% (Exhibit A-2) is the first rate iterative solution routines land on when following this algorithm. So let's add this rate to our bucket of potential rates as a possible solution. That makes two potential rates and counting,

Therefore the MISFM-Legacy  is a method that uses both the sinking fund concept and additional new investment as sources to cover outflows,  the sinking fund first and then thereafter, new investment as needed. The process of going outside the transaction for new investment can introduces sign change swings and begs the question of why are we using an extended method in the first place?  It allows and promotes more than one sign change to exist or remain in the flow series. Why not just use the first rate we landed on for the raw flows of 9.2575% (IRR Exhibit A-1)if in fact we are going to allow the sign changes to remain at more than one (three in this case)? I do not have a logical answer to that question because there probably is none. Absent an amortization schedule to study  we can't begin to discern this. Again, no such schedule was apparently provided in FASB13?

Continuing the examination of the logic surrounding the MISFM -Legacy algorithm, we can ask if new investment is allowed into the transaction towards the end of the deal to pay the negative flows, then why not allow the introduction of new money via  loans or new investment in the beginning of the deal that can be  paid back towards the end or retained?  New investment that is paid back can be viewed as loans and visa versa. Let's look at how early new inflows or indirectly, early existing inflows that are allowed to stay when they should be set aside in a sinking fund for future outflows (exactly what the MISFM -Legacy is doing)impact yield and earnings per share.Exhibit B-2shows that by introducing a loan of $200,000 into the deal in year 4 (can be viewed as temporary equity) and paying it back in year 15th we have increased the reported yield to 10.585% This is exactly the same impact as leaving money that should be put into the sinking fund( but instead is left to enhance early year flows), has on yield and EPS. Again, the unmodified flows continue to have more than one sign change in the rolling forward total flows as does the modified flows for this scenario. Same question, why bother changing the flows or modifying or extending the flows if they do not eliminate the multiple yield issue? So we now have a third yield of 10.585% for the MISFM to throw into the bucket  of possible rates to use.  Oh yes, there is no apparent reason to disqualify the IRR rate under Exhibit B-1 as yet another potential rate to use. It is given as 21.4273%. That make two more rates we can add to the bucket or a total of 4 and counting. After all, these rates are only being used to distribute the same total income over the term, only using different mix of proportions by year.

As long as we can introduce new capital and thereby leave existing flows to enhance yield early on or introduce new money via loans early on to be paid back late in the deal, or return the capital investment later in the deal, then we have a large scenario of rates we can orchestrate. It is all about timing of flows....the time element which we are trying to eliminate when doing DCF. Yes. we will consistently get the same unique yield using the MISFM-Legacy on the first iterative pass (remember other rates may exist if the yield engine continues searching per Descartes Rule of signs). The first yield landed on has absolutely no basis in reason. It is a consistently arrived at wrong and illogical answer.  It is no more logical to leave money that should be set aside in a sinking fund for future payments and then rely on expense free new investment  to meet the payment than it is to lend new money in via cost free loans early on and pay it back towards the end. New money from investment or loans destroys the integrity of the rate analysis by allowing the continuation of the multiple rate potential, and distorting the original cash flow using an endless number of arbitrarily arrived at cash flow solutions.

We could recode the yield engine so as to keep searching for potential rates that discount to zero. This would be an academic exercise of little value. Descartes rule states that not in all cases will there be multiple yields so if you use the MISFM-Legacy it may be a unique rate. Is that any way to roll? We do not think so nor do the people that invented the extended yield methods. They would not have gone to such lengths to avoid multiple sign changes if they felt they could work with a "may be". Can you tell an investor that the rate he thinks he is earning may not be the only rate existing for his investment?

There  are complex cash flows wherein the modifications under the MISFM -Legacy result in the same adjusted cash flow as the SSFM adjusted cash flow, thereby giving the same rate answer and being correct in that they both meet the single sign change test. Most of the time the MISFM-Legacy will give a different answer from the SSFM.  Only on rare occasions will the nature of the flows produce this same result. We have examples of this among our 65 examples supplied with PAMS-DCF software.
Enough said about the MISFM-Legacy and its' issues. As far as PAMS-DCF and good DCF techniques is  concerned, the MISFM-Legacy  is a non-starter in the vast majority of cash flows. That is why we test every adjusted flow for Descartes rule. We have demonstrated how arbitrary and illogical the MISFM-Legacy's algorithm is , and how easily it can be manipulated once you accept the logic of ADDING NEW MONEY .Lets discuss the 3rd method that  PAMS_DCF's  yield engine uses, the Standard Sinking Fund Method or  the SSFM. Sometimes this method is referred to as the "Traditional sinking fund Method".  See Exhibit A-3, B-3 and C-3. All Exhibit C schedules begin with the SSFM cash flow as modified by its' algorithm which results in a modified flow that does pass the single sign change test and then we modify it again to include new capital or debt by adding a $ 200,000 flow to year 4 and a negative offsetting flow to year 15 for the payback or removal of the equity. We did this as one of many efforts to manipulate the rate using this method. As you can see fromExhibit C-1 and C-2, the rate is manipulated upwards, but does not change in Exhibit C-3 In fact if you look at all three Exhibits, A, B and C you will note that the SSFM(X-3) has remained the same at 5.367%. We tested many other scenarios and the same result was found to hold true.  At most, a relatively small change in rate will result (under 10 basis points as compared to the hundreds of basis point changes in the MISFM-Legacy). You may also notice that the interest earnings in the first 5 years is substantially lower under the SSFM than under the MISFM-Legacy by about 80%, hence EPS are 80% lower in the first 5 years.  Is this good Economic Incentive enhancement ?  "Not so much" as compared to the MISFM-Legacy. Exhibit C-1 and C-2 produce two more different rates we can throw into the bucket, making 6 and counting. We could go on making an infinite number of cash flow scenario's all returning a net income of $116,600 over the same term or years.  The IRR is 14.285% and the MISFM  is 10.4887%. They both  fail the sign change test  in unmodified (IRR) or modified (MISFM) cash flows. This method with the $200,000 added to the SSFM modified flow is just another Pick Your Rate method. We can call this method the Enhanced Standard Sinking Fund Method.  It is  useless  other than to demonstrate that different rate scenarios can be orchestrated to amortize the same amount of income for an infinite number of cases. The only method that consistently returns a rate that is guaranteed unique and is always or nearly always (varying only slightly if at all) the same for the flows presented even when enhanced or modified by manipulation in timing and/or introduction of new flows from capital or loans seems to be the SSFM ( Traditional Sinking Fund Method). A manual or computer driven adjustment to cash flows that results in only one sign change will result in one unique rate and can be a qualifying method, whatever name we give it!

As an aside, adding a realistic sinking fund rate to earn interest on the sinking fund results in a whole new set of rates and considerations.  As an example, a sinking fund rate of 6.5% will increase the SSFM return yield to 8.4155% nearing the same rate as the MISFM-Legacy with a zero SFR assumed.  Another words if the company owning the leveraged lease had a means of investing the sinking fund at 6.5% doing the SSFM would return nearly the same rate as the MISFM-Legacy since the method creating the larger sinking fund (SSFM)will tend to catch up on earnings with the MISFM-Legacy all other things being equal... Ignoring Sinking Fund Earnings opens up a whole new can of worms best left for future discussion.
We have tried to explain what "Extended Yield Methods" are and what their purpose is. In trying to do so we covered some mathematical  territory driving home the importance of Descartes Rule of Signs and its' impact on cash flow analysis. We have examined just two of many potential extended yield methods or concepts that can be created.  The MISFM-Legacy which provides for future flows partly from a sinking fund (created for a short period early in the transaction), but mostly through reliance on new investment , and the SSFM which generally relies solely on earlier flows from within the transaction with which it creates a sinking fund to cover all the subsequent out flows. It was our intention to present the fundamental reasons for doing extended yield analysis and providing you with the necessary understanding to help you develop your own scenarios in addition to the two extended methods PAMS uses. We have computer power at our disposal that was not available to Joe Blow at the time the MISFM-Legacy was conceived.
Doing DCF analysis without access to a computerized system is impossible given our life spans. The use of a capable, versatile, easily and quickly manipulated computerized system is absolutely necessary. PAMS-DCF is just such a system thanks in part to the choice of EXCEL as its database,  which most people have and are familiar with. Excel, when coupled to the front-end input software and powerful yield analysis engine make an unprecedented combination for dealing with DCF analysis.

PAMS-DCF is a tool that is affordable and easily learned and should be as basic to the tool box of every financial industry person and financial educator as a hammer is to a carpenter. We at PAMS-DCF Inc. intend to see to it that everyone can afford to have access to this tool and the knowledge to use it,

                                    that is our Mission.                                                                       

Tuesday, July 7, 2015


After reviewing some literature about the current accounting developments, I am arriving at the conclusion that if nothing else changes in leveraged lease reporting from the lessor side, it is highly likely that the MISFM is history. It is a positive development as the method had no basis in logic or good discounted cash flow techniques. Along with the elimination of the MISFM will likely go the elimination of all after tax techniques in the accounting for leveraged leases on the lessor side. That is too bad! I am not certain what is driving leveraged deals today. I have read that few are getting done. Perhaps the lowering of effective tax rates, the off-shoring of income and other avenues of shelter have made the need for leveraged deals less. Lower interest rates also reduce the need for tax benefits. Whatever the reasons, the MISFM never had a place in good DCF theory or practice. It's only reason for existence was that it was used in distributing income in the leveraged lease lessor reporting arena. If that goes away it has no reason to ever exist (except to review past bad reporting). RIP were born from ignorance, lived in glory, and died in ignominy. You drove the boom in the leasing industry for such greats as GE Capital for many years, and for that you deserve your glory.

Saturday, June 27, 2015

Extended Yield methods:Part 4
Where's the Sunshine? 

To sum up, extended yield methods were designed to deal with complex cash flows (cash flows wherein the rolling sum of the flows change signs more than once). they go from negative to positive and back to negative then to positive again such that their rolling forward sums give rise to yield curves that cross the zero rate axis more than once. The intent was and is to eliminate the wild swings in cash flows so as to limit the sign changes to only one.  Doing so eliminates the potential for other positive rates existing in the modified flow.  Any method that does not eliminate the multiple yield potential from the cash flows is not doing its' job. It leaves us with a transaction that can't be represented by rate of return, as many or more than one rate may exist. To pick one rate ignores the rest.  It also facilitates  the manipulation of rate by making it easy to move cash flows around the term as long the total flows remain the same. Many yield rates can be sought and landed on for many different adjusted flows using the "Pick Your Rate" method. This makes the model entirely arbitrary and hence unacceptable. It is not logically computed and does not provide a unique computation of rate inherent to the flow. It is just one of many rates that performs a mathematical function of resolving the present value to zero and nothing more.

We have tried to relate in this discussion how and why rate analysis must adhere to the mathematical principles espoused by Descartes' rule of signs.  The genesis of extended yield methods was created for the sole purpose of making it possible to adhere  to Descartes rule of signs.

PAMS-DCF's yield engine checks for adherence to Descartes' rule of signs in both the initially presented unmodified flow and the modified flow, giving appropriate warnings when necessary. If someone wishes to use  a non-unique rate to distribute income over the transaction term,  then they can do so. It may be a misrepresentation of the return on the transaction, and it may give rise to violations of good accounting principles that call for using a distribution that matches costs against revenues, full disclosure, a non-arbitrary basis for computation, etc., but so be it. The Investment Tax Credit  (does anyone remember the ITC ?) was taken into income all in the year of acquisition and not amortized over the life of the asset as good accounting demanded. The accounting profession objected loudly but with little success.  Congress said it was OK. 

Similar to the MISFM (Legacy), the ITC accounting served as an immediate economic incentive resulting in increased earnings per share in the early years. Rules are broken all day long, and principals are violated over and over again, but one should be aware of the what and wherefore of these issues so that they are not misapplied to other situations. I repeat, the MISFM-Legacy had and may have a place, but not as representing a good example of yield analysis techniques.

We intend to demonstrate  that new investment is a non-starter in building cash flow models and using discounted cash flow analysis. We will be using examples of FASB13 in the next installment of this discussion on "Extended Yield Methods" because it is a well known example and easily available for study. It will clearly show that the modified cash flow generated by the MISFM-Legacy results in arbitrarily adjusted cash flows distribution of income and is not the only rate that , once given the freedom to introduce "new Capital",  that will discount other adjusted flows  to zero within the confines of the transactions net income.  We will then proceed to review one or two methods that do work to eliminate the multiple yield issue and what their impact is on the timing of profit recognition within the transaction. 

The entire purpose of this exercise is to demonstrate that Descartes  Rule of Signs must be adhered to and that "Extended Methods" were created to for the sole purpose of making this possible. To have created a method such as the MISFM-Legacy that only partially adheres to the " rule of signs" by providing for only the first few negative flow and ignoring  the remaining negative flows is at best obscuring the technically correct approach, demonstrating incorrect concepts and principals and causing confusion about the techniques used in DCF analysis. It is an example of  obfuscation at its' best. That is perhaps one reason it is being abandoned, except that the current thought is to abandon all after tax accounting recognition done using good DCF techniques or bad ones. On the positive side the MISFM-Legacy added incentive to do these transactions. I do not see why EPS has to be tied to good DCF techniques! Let the EPS issue be whatever the parties agree to, but the mathematical truisms should always be honored.

As an aside, FASB13 is a great publication and it broke new ground in accounting in many areas.  The concepts as noted in our book that accompanies PAMS-DCF, should not be discarded. They included the "Economic Reality" concept, and substance over form concepts that FASB13 dealt with. That FASB13 did not land on a proper method for use in distributing  leveraged lease income is a minor flaw in the overall achievement, and can be easily fixed by simply clarifying the need to adhere to Descartes Rule of Signs. Any method that results in an inherent unique yield should be acceptable to spread income with. Yes, changes can be made that will improve FASB13 in several areas, but discarding after tax analysis and reporting is not necessarily one of them.

An argument can be made that leveraged leases are less needed in today's tax environment as companies are paying much lower effective tax rates than in the past, but that can change quickly. Further, leveraged lease accounting may be more trouble than it is worth from some peoples perspective, however, it was the segue into areas of finance that accounting types such as myself never had cause to look at. Perhaps it is simply to complex to deal with from a practical standpoint. The economic analysis of a leveraged lease or a leveraged real estate transaction, or business acquisitions, etc..will always require good DCF understanding and techniques regardless of what happens to FASB13.

   Congress would not allow accounting firms to write an exception when ITC was taken in year one. I don't know of any firms that did. The Financial Accounting Standards Board may not allow pretax income to be distributed on an after tax proportional basis as conceived of when the deal is done, but that does not change the reality of why it was done and how it will be earning real cash. It is a step backwards for the accounting profession to throw it all out ( in my humble opinion).

(to be continued using examples as Part 5 " A Picture is Worth 1,000 Words")

Sunday, June 21, 2015

Extended Yield Methods: Part 3 Smoke and Mirrors

Extended Yield Methods: 
Part 3  Smoke and Mirrors

Let's look at the second source of funds into which we lumped loans and new investment.  Let's discuss loans first as they are less problematic than new investment.  In order to make the transaction logically supportable, with all loose ends sewed up, a loan commitment along with interest rates would have to be put in place.  The loan proceeds would be used to zero the negative flows and thereby avoid a sign change situation. The payback of the loan plus interest would come from subsequent positive inflows. This approach is the only approach where the prior flows are not adequate to meet subsequent outflows or set up a sinking fund of adequate size, unless you resort to the "new investment assumption".

The new investment or multiple investment assumption has many issues that are inherent in it.  Unlike a loan, it is not assumed to be paid back by the end of the transaction. Neither is there a cost introduced to the deal to cover its availability and use as in a loan. A loan has a commitment fee and interest for the use as part of the transaction costs. A commitment from investors could be gotten and put in place similar to a loan commitment.  With or without a commitment,  new investment is being introduced at a later date.  Even if early flows are adequate to meet  future outflows, they must be set aside in a sinking fund and not left in the transaction to enhance yield by relying on new expense free investment  to cover outflows. The question becomes how do you cost the new investment such that it factors into the computations of the return on the original investment which is often years earlier? Simply put, the answer is you can't. The new investment destroys the present value computations on the original investment, and effectively starts a new deal. Hence, multiple rates arise.  It is a non-starter and a red herring to include new investment in a model if it changes the rolling total of flows sign. There can't be any significant outflows such that they cause the sign of the rolling forward sum of the flows to change without creating a meaningless yield that will resolve to zero mathematically. That is the primary issue with the use of cost free new investment . You have to ignore the sign change requirement of Descartes rule of signs.

What happens if you ignore the single sign change requirement?  What would govern the amount of capital you would need?  The simple answer is very little would constrain the amount of capital that could be introduced to meet negative flows. In fact, scenarios or modifications could be easily formulated for pushing positive flows anywhere in the flow stream and making up for them with new investment in other years within the flow steam so that they total to the same overall income.  You could call that method the PYR method or "Pick Your Rate" method. There are only limited constraining requirements to the modifications. Consider also that it would not be possible to assure an investor that the return on investment presented is the only positive return that would discount the flows to zero. The rate can be easily manipulated over a wide spectrum of rates, each giving rise to a different earnings curve. This makes the periodic earnings arbitrary at best.

The above noted situation will be demonstrated later on in this series by using many examples of the FASB13  leveraged lease model in which the modified flows do not meet the single yield rule test. Again, the unmodified flows fail to meet the single yield requirement and the modified flows also fail! The early year's flows can be enhanced by some arbitrary amount, and future negative investment can be increased to offset the early enhancement resulting in a new rate of earnings curve amortizing the same total income. You could as the MISFM-Legacy does, just set up a sinking fund to cover the first few negative flows and ignore the rest of the negative flows saying new investment will cover them. You could say the MISFM is a mix of a Sinking Fund Method and the PYR method since it does both. The MISFM-Legacy kind of introduces the sinking fund idea but does not execute it across the term of the deal.  As long as you accept the notion that you can introduce expense free capital at any time during the transaction life cycle you have an infinite number of potential rates you can orchestrate. The rates do not reflect any meaningful solution.  The rates are simply mathematical solutions to the new flow series you have created. The example in FASB13 of a  leveraged lease (using MISFM-Legacy) is a very poor example of the use of discounted cash flow analysis as it demonstrates the improper use of techniques and promulgates an arbitrary answer. This can only lead to confusion and distrust.

Any cash flow analysis system worth its salt must have a test for multiple sign changes and clearly report on that test. Whether the cash flow is modified by hand or using a computerized algorithm, the system should test and report on the modified flows as well. Modifications and testing has to be done until the multiple yield issue is eliminated. If the modifications can't be done and still provide a viable transaction investment, then the transaction may have to be abandoned. The key point is that there can be only one real yield, the one that discounts the flows to zero with the knowledge that no other positive rates will do the same. To find that rate, the flow must show only one sign change over the term. This is the only purpose of using extended methods. Telling an investor that he is earning at a rate that may not be inherent in the transaction is at best misleading.

It does not matter what the nature of the investment is, real estate construction and sales, business projections, leveraged leases etc. , the same principals will apply. A polynomial is still a polynomial, a cash flow is still a cash flow, that will not change. 

(to be continued) . . . parts 1, 2 and 3 are now completed

Saturday, June 20, 2015

Extended Yield Methods: Part 2 Sources of Funds

Page 2 of the Discussion Page at


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.

(to be continued)

Thursday, June 18, 2015

Extended Yield Methods: Introduction

                What are  Extended Yield Analysis Methods ?Introduction Part 1:


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)

Wednesday, June 17, 2015

Saying Hello

Hello everyone in the accounting and finance world:

We hope to use this blog to mirror posts that will appear on my web site "Discussion" pages at WWW.PAMSDCF.COM. It will also serve to archive the web site postings and make it easy for readers to comment on topics.

We will also comment from time to time on current tax and financial issues.

I look forward to hearing from you.

Phil T.