Accounting Treatment of Leases

Historically, financial leases were "off the balance sheet” financing. That is, lease obligations often were not recorded directly on the balance sheet, but listed in footnotes, instead. Not explicitly accounting for leases frequently resulted in a failure to state operational assets and liabilities fairly.

In 1977 the Financial Accounting Standards Board (FASB), the rule-making body of the accounting profes­sion, required that capital leases be recorded on the balance sheet as both an asset and a liability. This was in recognition of the long-term nature of a lease obligation.

Cost Analysis of Lease v. Loan/Purchase

You can analyze the costs of the lease versus purchase problem through discounted cash flow analysis. This analysis compares the cost of each alternative by con­sidering: the timing of the payments, tax benefits, the interest rate on a loan, the lease rate, and other financial arrangements.

To make the analysis you must first make certain assumptions about the economic life of the equipment, salvage value, and depreciation.

A straight cash purchase using a firm's existing funds will almost always be more expensive than the lease or loan/buy options because of the loss of use of the funds. Besides, most small firms don't have the large amounts of cash needed for major capital asset acquisitions in the first place.

To evaluate a lease you must first find the net cash outlay (not cash flow) in each year of the lease term. You find these amounts by subtracting the tax savings from the lease payment. This calculation gives you the net cash outlay for each year of the leases.

Each year's net cash outlay must next be discounted to take into account the time value of money. This dis­counting gives you the present value of each of the amounts.

The present value of an amount of money is the sum you would have to invest today at a stated rate of interest to have that amount of money at a specified future date. Say someone offered to give you $100 five years from now. How much could you take today and be as well off?

Common sense tells you you could take less than $100, because you'd have the use of the money for the five year period. Naturally, how much less you could take depends on the interest rate you thought you could get if you invested the lesser amount. For example, to have $100 five years from now at six percent compounded annually, you'd have to invest $74.70 today. At 10 per­cent, you could take $62.10 now and have the $100 at the end of five years.

Fortunately there are tables which provide the discount factors for present value calculations. There are also relatively inexpensive special purpose pocket calculators programmed to make these calculations.

Why bother with making these present value calculation? Well, you've got to make them to compare the actual cash flows over the time periods. You simply can't realistically compare methods of financing without tak­ing into account the time value of money. It may seem confusing and complex at first, but if you work through an example, you'll begin to see that the technique isn't difficult-just sophisticated.

Evaluation of the borrow/buy option is a little more complicated because of the tax benefits that go with ownership, loan in­terest deductions, and depreciation.

As noted earlier, the salvage value is one of the advan­tages of ownership. It must be considered in making the comparison. Naturally, it s possible that  salvage costs for real asset could be very high or be next to nothing. Salvage value assumptions need to be made carefully.

Thus, while this sort of analysis is useful, you can't make a lease/buy decision solely on cost analysis figures. The advantages and disadvantages discussed earlier, while tough to qualify, may outweigh differences in cost-especially if costs are reasonably close.

Look Before You Lease

A lease agreement is a legal document. It carries a long term obligation. You must be thoroughly informed of just what you're committing yourself to. Find out the lessor's financial condition and reputation. Be reasonably sure that the lease arrangements are the best you can get, that the equipment is what you need, and that the term is what you want. Remember, once the agreement is struck, it's just about impossible to change it.

The lease document will spell out the precise provisions of the agreement. Agreements may differ, but the major items will include:

The specific nature of the financing agreement,

Payment amount,

Term of agreement,

Disposition of the asset at the end of the term,

Schedule of the value of the equipment for insurance and settlement purposes in case of damage or destruc­tion,

Who is responsible for maintenance and taxes,

Renewal options,

Cancellation penalties, and

Special provisions.

As the Proprietor of Your own business you deal with issues in an almost daily basis. Getting comfortable with powerful Problem
Solving Techniques can radically affect the development of your business.

Although you Find solutions to your issues, many businessmen and women aren't really proficient in the ways of problem solving,
and if solutions neglect, they mistake themselves for misjudgment. The problem is usually not misjudgment but rather a lack of
ability.

This guide Instructs you in some problem solving techniques. Crucial to the success of a business faced with issues is your
comprehension of just what the issues are, defining them, finding answers, and selecting the best answers for your scenarios.

What's a problem. A problem is a situation that presents trouble or perplexity. Problems are available in many shapes and sizes.
For example, it can be:

Something did Not function as it should and you also do not understand how or why. Something you need is unavailable, and
something has to be found to take its place. Workers are undermining a new program. The market is not buying. What should you do
to survive? Customers are complaining. How do you manage their complaints?

Where do Problems come from? Issues arise from every aspect of human and mechanical purposes as well as from nature. Some problems
we cause ourselves (e.g., a hasty choice has been made and the wrong individual was selected for the job); other problems are
caused by forces beyond our control (e.g., a warehouse is struck by lightning and burns down).

Problems are a Natural, regular occurrence of life, and in order to suffer less from the anxieties and frustrations they cause, we
must find out to manage them in a rational, logical manner.

If we accept The fact that problems will appear on a regular basis, for many different reasons, and by an assortment of sources,
we could: learn to approach problems from an objective standpoint; learn how to expect some of these; and prevent a number of them
from getting larger problems.

To accomplish This, you have to learn the procedure for problem solving. Here, we'll teach you in the fundamental procedures of
difficulty. It's a step by step manual which you can easily follow and exercise. Since you follow this guide, you will eventually
develop some strategies of your own that work in concert with all the problem-solving process described within this guide.

Keep in mind, Though, as you read that this is not a comprehensive evaluation of the artwork of problem-solving but rather a
practical, orderly, and simplified, yet effective, method to approach issues considering the limited time and information most
company owners and managers have. Additionally, some issues are so complex that they need the further aid of specialists in the
field, so be prepared to accept the fact that some problems are beyond just one individual's ability, skill, and desire to
succeed.

In order to Appropriately recognize the issue and its causes, you must do some study. To do so, just list each of the previous
queries in checklist form, and maintaining the checklist useful, go about gathering as much information as you possibly can.
Remember the relative importance and urgency of the problem, in addition to your time limitations. Then interview the folks
involved with the problem, asking them the questions on your checklist.

After you've Gathered the data and reviewed it, you'll have a fairly clear understanding of the problem and what the major reasons
for the problem are. Now, you can find out more about the causes further through monitoring and additional interviewing. At this
time you should outline the problem as briefly as possible, list all of the causes you've identified, and list all the regions the
problem seems to be affecting.

At this point, You're ready to check your comprehension of the problem. You've already identified the problem, broken down it into
all its aspects, narrowed down it, done research on it, and you are avoiding typical roadblocks. On a large pad, write down the
problem, including all of the factors, the areas it affects, and what the consequences are. For a better visual comprehension, you
may also want to diagram the problem showing cause and effect.

Study what you Have written down or diagrammed. Call on your employees and talk about your analysis together. Based on their
opinions, you might choose to revise. Once you think you fully understand the causes and consequences of the problem, outline the
problem as succinctly and as simply as you can.

Go through your Long list of solutions and cross-out those who clearly will not work. Those notions aren't wasted for they impact
on those thoughts that remain. In other words, the best ideas you pick may be revised based on the thoughts that would not work.
With the remaining solutions, use what's called the"Force Field Analysis Technique." This is basically an analysis technique that
breaks the solution down to its positive effects and negative outcomes. To do this, write each solution you are considering on a
separate piece of paper. Beneath the solution, draw a line vertically down the middle of this newspaper. Label one column
advantages and one column downsides.

Now, some more Analytical thinking comes in to play. Assessing each facet of this solution and its influence on the issue, list
each of the advantages and disadvantages you can think of.

One way to help You think about the benefits and disadvantages is to role-play every solution. Call in a couple of your workers
and play out each solution. Ask them to their own responses. Based on what you see and on their feedback, you will get a clearer
idea of the benefits and drawbacks of each alternative you are thinking about.

Once you Complete this procedure for every solution, pick those solutions that have the Most advantages. At this point, you ought
to be considering only two or three.

swimsuit taco-truck tailoring-shop talent-management tattoo taxi tea technology teespring teeth-whitening textile thrift-store ticketing tie-dye tiffin tiles tint tire-recycling tire-shop title-loan tour-and-travel tourist-bus toy-store trading trailer-park training tree-service turf turky-farm tutoring tv-mounting typing uhaul ultrasound undergarment uniform used-clothes used-tire vacation-rental vada-pav vending-machine video-advertising video-editing video-production voice-over voip waxing web-design web-development web-hosting wedding-dj wedding-planning weight-loss welding-shop window-cleaning workshop workshop worm-farm wrecker yacht-chart yard-work yarn yogurt zoo zumba-fitness