Lease Analysis
Oracle Assets allows you to test leased assets in accordance with generally accepted accounting principles to determine whether to capitalize and depreciate your leased assets.
Note: The Financial Accounting Standards Board (FASB) has defined certain criteria used to determine whether a lease qualifies for capitalization. Many other countries use similar test criteria.
In addition, Oracle Assets lets you analyze alternate leasing strategies so you can structure your leases to best meet your business requirements.
Lease Capitalization Test
Many countries require that a leased asset be capitalized and depreciated if any one of the following four criteria is met:
- The ownership of the asset transfers to the lessee at the end of the lease (Test 1)
- A bargain purchase option exists (Test 2)
- The term of the lease is more than 75% of the economic life of the leased asset (Test 3)
- The present value of the minimum lease payments exceeds 90% of the fair market value of the asset at lease inception (Test 4)
When you set up a lease, you can enter information that Oracle Assets uses to automatically calculate the present value of the payment schedule, and to determine if any of the tests listed above are met. If your lease meets one of the four tests, Oracle Assets defaults the lease type to Capitalized, and the asset cost to the lessor of the fair value or the present value of the payment schedule for any assets assigned to the lease.
Payment Schedules
You can define and calculate the present value of a payment schedule. Oracle Assets can accommodate all types of lease payment structures and lease payment types. These include normal annuities, balloon payments, bargain purchase options, bargain renewal options, and guaranteed residual values, penalties, skipped payments, and overlapping payments.
Amortization Schedules
You can create amortization schedules that allocate capital lease payments between principal and interest based on the effective interest rate implicit in the lease contract.
Operating Leases
Oracle Assets tracks your payments under operating leases, or leases which do not meet any of the criteria, for informational purposes. You can use this information to create a schedule of future minimum payments under operating leases, information that may require disclosure in the footnotes of your financial statements.
Lease Evaluation
Oracle Assets allows you to evaluate alternate leasing strategies by manipulating variables such as the periodic lease payment, balloon payments, payment dates, and the fair value of the asset.
Example 1: Set Up Lease
Coastal Landscapes is entering a five year equipment lease with Marine Technologies on March 1, 1993. The fair value of the equipment is $100,000. The lessee's incremental borrowing rate is 12%. The minimum lease payments consist of monthly payments of $1,900 of which three payments are due at lease inception. The first regular payment is due on April 1, 1996. There is no bargain purchase option, and the title does not transfer to Coastal Landscapes at the end of the lease. The economic life of the asset is six years.
Before you add any of the assets to the lease, enter the following information in the Lease Details window to set up the lease:
| Lease Number
| 325
|
| Description
| Equipment Lease
|
| Lessor
| Marine Technologies
|
| Payment Schedule
| Marine Lease
|
| Currency
| USD
|
| Transfer of Ownership
| No
|
| Bargain Purchase Option
| No
|
| Lease Type
| Capitalized
|
| Lease Term
| 60
|
| Asset Life
| 72
|
| Fair Value
| 100,000
|
Note: You can choose a predefined payment schedule in the Lease Details window to attach to your lease.
If you have not already defined the lease's payment schedule, choose the Payment Schedule button from the Lease Details window to enter the payment schedule information for this asset and calculate the present value of the payment schedule. Enter the following Payment Schedule information:
| Payment Schedule
| Marine Lease
|
| Currency
| USD
|
| Present Value
|
|
| Lease (inception) Date
| 3/1/93
|
| Interest Rate
| .12
|
| Compounding Frequency
| Monthly
|
| Lease Payments:
|
|
|
|
| Start Date
| Payment Amount
| Number
| Payment Type
| End Date
|
| 3/1/93
| $5,700
| 1
|
|
|
| 4/1/93
| $1,900
| 57
| Annuity
| 12/1/97
|
You can now choose the Calculate button to determine the present value of the payment schedule. The present value in this example is $87,945.53. Since $87,945.53 is less than $100,000 (fair value), it is also the cost to capitalize if one of the four tests are met.
Oracle Assets updates your lease information after calculation as follows:
| Payment Schedule
| Marine Lease
|
| Present Value
| 87,945.53
|
| Lease (inception) Date
| 3/1/93
|
| Interest Rate
| .12
|
| Lease Payments:
|
|
|
|
| Start Date
| Payment Amount
| Number
| Period
| End Date
|
| 3/1/93
| $5,700
| 1
|
|
|
| 4/1/93
| $5,700
| 57
| Monthly
| 12/1/97
|
Once you calculate the present value, you can create an amortization schedule by choosing the View Amortization button on the Lease Payments window. In this example, the present value of the payment schedule is $87,945.53. The total amount to be paid under the lease is $114,000. The difference of $26,054.47 represents interest expense that must be recognized over the life of the lease:
| Start Date
| Payment
| Interest (12% yr.) Portion of Payment
| Reduction of Principal
| Lease Obligation
|
|
|
| (a)
| (b)
| (c)
|
| 3/1/93
|
|
|
| 87,945.53
|
| 3/1/93
| 5,700.00
| 0
| 5,700.00
| 82,245.53
|
| 4/1/93
| 1,900.00
| 822.46
| 1,077.54
| 81,167.99
|
| 5/1/93
| 1,900.00
| 811.68
| 1,088.32
| 80,079.67
|
| ...
| ...
| ...
| ...
| ...
|
| 11/1/97
| 1,900.00
| 37.44
| 1,862.56
| 1,881.19
|
| 12/1/97
| 1,900.00
| 18.81
| 1,900.00
| 0
|
| Total:
| 114,000
| 26,054.47
| 87,945.53
| 0
|
(a) The interest rate per period (in this example, 12%/12=1%) multiplied by the prior period lease obligation, except for the 3/1/93 payment; since no time has elapsed, no interest has accrued.
(b) The Payment amount less (a).
(c) Prior period amount (c) less current period amount (b).
For each period you make a payment, cash would be credited for the entire amount of the payment. The offsetting debit is split between liability and interest expense as calculated above.
When you save the payment schedule, Oracle Assets automatically returns to the Lease Details window, where you can attach the schedule you just defined to your lease.
Note that Oracle Assets defaults the Present Value field in the Lease Details window from the attached payment schedule. The 90% test has not been met. The lease still qualifies for capitalization, however, as the economic life test was met. The cost to capitalize is $87,945.53, since this is the lesser of the present value of the payment schedule or the fair value. When you attach this lease to an asset, the Books window displays the cost to capitalize as the default value for current cost of the leased asset. You can change this value if necessary.
Example 2: Set Up Payment Schedule
Fremont Corporation has entered a lease agreement dated January 1, 1990. The term of the lease is five years, requiring equal rental payments of $20,000 at the beginning of each year. The equipment has a fair value of $100,000 and an economic life of ten years. The lease contains a bargain purchase option for $5,000. The lessee's incremental borrowing rate is 10%.
You would enter the following information in the Lease Payments window:
| Payment Schedule
| Schedule 1
|
| Present Value
|
|
| Lease (inception) Date
| 1/1/90
|
| Interest Rate
| .10
|
| Compounding Frequency
| Annually
|
| Lease Payment:
|
|
|
|
| Start Date
| Payment Amount
| Number
| Payment Type
| End Date
|
| 1/1/90
| $20,000
| 5
| Annuity
| 1/1/94
|
| 1/1/95
| $5,000
| 1
|
|
|
The present value of the payment schedule is $86,501.92.
Example 3: Analyze Lease to Maximize Use of Existing Funds
CDI Technology has set aside $18,000 to finance the lease of chip manufacturing equipment. CDI wants to lease the equipment for four years. The money is currently deposited in an account that earns 10% interest compounded semi-annually. CDI wants the lease to commence immediately, with the first payment due six months from today (1/1/90). What is the maximum amount that CDI can pay in semi-annual lease payments over the next four years without exhausting the fund until the last payment?
You would enter the following information in the Lease Payments window:
| Payment Schedule
| Chip costs
|
| Currency
| USD
|
| Present Value
| $18,000
|
| Lease (inception) Date
| 1/1/90
|
| Interest Rate
| .10
|
| Compounding Frequency
| Semi-annually
|
| Lease Payment:
|
|
|
|
| Start Date
| Payment Amount
| Number
| Payment Type
| End Date
|
| 7/1/90
| 2,784.99
| 8
| Annuity
| 1/1/94
|
Once Oracle Assets calculates the present value, you can create an amortization schedule for the projection by choosing the View Amortization button on the Lease Payments window. In this example, the present value of the payment schedule is $18,000. The total amount to be paid under the lease is $22,279.22. The difference of $4,279.92 represents interest expense that must be recognized over the life of the lease.
| Start Date
| Payment
| Interest (10% yr.) Portion of Payment
| Reduction of Principal
| Lease Obligation
|
|
|
| (a)
| (b)
| (c)
|
| 1/1/90
|
|
|
| 18,000.00
|
| 7/1/90
| 2,784.99
| 900.00
| 1,884.99
| 16,115.01
|
| 1/1/91
| 2,784.99
| 805.75
| 1,979.24
| 14,135.77
|
| 7/1/91
| 2,784.99
| 706.79
| 2,078.20
| 12,057.57
|
| 1/1/92
| 2,784.99
| 602.88
| 2,182.11
| 9,875.46
|
| 7/1/92
| 2,784.99
| 493.77
| 2,291.22
| 7,584.24
|
| 1/1/93
| 2,784.99
| 379.21
| 2,405.78
| 5,178.46
|
| 7/1/93
| 2,784.99
| 258.92
| 2,526.07
| 2,652.39
|
| 1/1/94
| 2,784.99
| 132.60
| 2,652.39
| 0
|
| Total:
| 22,279.92
| 4,279.92
| 18,000.00
| 0
|
(a) The interest rate per period (in this example, 10%/2=5%) multiplied by the prior period lease obligation, except for the 3/1/93 payment; since no time has elapsed, no interest has accrued.
(b) The Payment amount less (a).
(c) Prior period amount (c) less current period amount (b).
See Also
Entering Leases
