| FAS # 13 Wizard
According
to FAS No 13, a capital lease is defined as a lease that meets
any one of the four criteria:
Criteria 1. Transfer
of Ownership
If the lease agreement
transfers ownership to the lessee before the lease expires,
without payment of additional compensation to the lessor, the
lease is considered a purchase / financing arrangement.
Criteria 2. Bargain
Purchase Option
The lease is deemed to be a
Capital Lease if the lessee can purchase the asset for a
bargain price when the lease expires. A bargain purchase
option requires comparing the option's purchase price to the
leased asset's expected residual value at the maturity of the
lease. If the purchase option is well below the expected
residual value, the lessee is unlikely to pass up the savings,
the probability is high that the lessee will buy the asset at
maturity.
Criteria 3.
Seventy-five Percent of Economic Life.
For the lease to be defined
as a Capital Lease, the lease must last for at least 75
percent of the asset's expected economic life. A bargain
renewal option, that is, an option to renew the lease at a
rental rate below the expected fair market rental at the time
of the exercise of the option, is considered to lengthen the
lease life used in this determination.
Criteria 4. Ninety
Percent of Asset's Value.
The present value of the
minimum lease payments must be at least 90 percent of the
asset's fair value for the lease to be deemed to be a
Capital Lease. The minimum lease payments are defined as 'the
payments that the lessee is obligated to make or can be
required to make in connection with the lease property'.
Periodic payments account for the majority of the minimum
lease payments. Other components include such items as the
bargain purchase option or bargain renewal option payments.
Some leases also contain additional provisions that are
included as minimum lease payments, such as a guaranteed
residual value by the lessee or a penalty for failure to renew
if it is expected that the lessee will pass up the renewal
option.
The determination of the
appropriate discount rate at which to discount the lease
payments is very important. FAS No 13 states that the
lessee is required to compute the present value of the minimum
lease payments using the lower of the lessor's incremental
borrowing rate or the implicit discount rate used by the
lessor. The lessee's incremental rate is defined by FAS
No 13 as ' the rate that, at the inception of the lease, the
lessee would have incurred to borrow the funds necessary to
buy the leased asset on a secured loan with repayment terms
similar to the payment schedule called for in the lease'.
Lease Analyst FAS NO 13
Wizard
WorthIT Lease Analyst FAS
No 13 wizard uses the data you submitted for a lease and
applies the above criteria to provide you with a summary to be
used as a guideline in formulating an opinion.
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