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.

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 .

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.

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.