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Glossary of Finance Terms A - Z


Accession: An asset that becomes incorporated into other goods or property after being added or attached to the other goods or property. -top-

Accrual Basis of Accounting: A method of accounting whereby income is recorded when earned; whether or not the money has been received at that time, and expenses are recorded when incurred, whether or not any money has actually been paid out. -top-

Acid Test Ratio: (Current assets - inventories - prepaid expenses) ) current liabilities. This ratio is a more stringent measure of liquidity than the current ratio, in that it subtracts inventories (the least liquid current asset) from current assets. -top-

Advance Payments: Like most rental agreements, lease payments are due in advance rather than in arrears. Lease structures commonly require the first and last payments to be made in advance, with the last payment being held as a security deposit until due. -top-

Amortization: The process of liquidating a value incrementally at regular intervals. A debt can be amortized by making periodic payments. An investment in equipment can be amortized by allocating depreciation expenses each accounting period. -top-

Annuity: A sequence of periodic payments (usually even or equal) made at equal intervals of time. An Ordinary Annuity features payments in arrears, or at the end of each period. An Annuity Due is one in which the payments are made in advance, or at the beginning of each period. -top-

Appraisal: An arbitrary estimate or assessment of the value of an asset, usually by an entity or individual deemed to have specific expertise with the subject. The value of a company as stated by an independent appraisal firm. -top-

Asset-Based Financing: The financing of specific equipment and vehicles and of related items or services, primarily by way of lease, secured loan, or conditional sales contract. -top-

Balance Sheet: A basic accounting statement that represents the financial position of a firm on a given date. -top-

Balloon Payment: A payment that is significantly larger than the regular periodic term payments. Usually it occurs at the end of a payment schedule because the debt has not been fully amortized during the initial term. For example, a one-year financing arrangement providing for interest-only monthly payments during the year, with the principal plus the last interest payment due on the final payment date, is said to have a "balloon payment" or simply a "balloon" due at the end of the term. -top-

Bargain Purchase Option: A provision of a lease agreement allowing the lessee to purchase the leased property at the end of the lease term for a price that is significantly lower than the expected fair market value of the property. Often requested by the lessee to ensure that they can receive ownership of the asset, or provided by the lessor to ensure that the asset will not be returned. -top-

Bargain Renewal Option: A lease provision allowing the lessee to extend the lease for an additional term in exchange for periodic rental payments that are sufficiently less than fair value rentals for the property. -top-

Base Lease Term: The primary period of the time that the lessee is entitled to use the lease equipment, without regard to any interim or renewal lease term. The base lease term of a five-year lease is five years. -top-

Basis Point: A measurement of lending interest rates equalling One one-hundredth of a percent (.01%). An interest rate that drops from 10% to 9.5% has dropped 50 basis points. -top-

Big Ticket: A leasing industry market segment generally represented by individual lease transactions valued at over $1 Million. -top-

Broker: A person or entity that arranges lease transactions between two other parties (the lessee and the lessor). -top-

Bundled Lease: A lease that includes other additional services beyond financing, such as maintenance, insurance and property taxes. The lessor pays for the additional services, and the cost is built into the lease payments. Also known as a Service Lease. -top-

Buyout: A payment made by the lessee prior to, or at the expiration of, the base term of the lease to terminate the agreement and take title to the asset. -top-

Capital Asset: All property used in conducting a business other than assets held primarily for sale in the ordinary course of business or depreciable and real property used in conducting a business. -top-

Capital Budgeting: The decision-making process with respect to investment in fixed assets. Specifically it involves measuring the incremental cash flows associated with investment proposals and evaluating those proposed investments. -top-

Capital Cost Allowance: Revenue Canada's prescribed method for offsetting the amortization of investment in depreciating assets against taxable income. -top-

Capital Lease: An accounting classification, for a lease, that transfers substantially all of the risks and benefits of asset ownership to the lessee. The lessee would record the leased asset and corresponding liability on their balance sheet. Often referred to as a Finance Lease. -top-

Capitalize: To record as an asset any expenditure that may benefit future periods rather than recording the expenditure as an expense charged off in the period it occurs. -top-

Capitalized Cost: A term commonly used to refer to costs which have been included in determining the total cost, or value that the lease payments will be based upon. From a financial reporting perspective it is the total value of an asset to be shown on the balance sheet. The total capitalized cost is also the amount upon which tax benefits, such as depreciation deductions, are based and may include the assets cost plus other amounts such as sales tax, delivery and installation costs, fees, etc. -top-

Captive lessor: A subsidiary of an equipment distributor or manufacturer, set up to provide financing for the sale or lease of its own products to end-user clients.

Cash Flow: Financial benefits resulting from an activity, transaction, or series of transactions. Cash flows can be negative (i.e. purchasing supplies) or positive (i.e. receiving payment for sales). The primary objective of a business is to generate greater positive long-term cash flows than short-term negative cash flows.

CCA: See Capital Cost Allowance. -top-

Certificate of Delivery and Acceptance: A document signed by the lessee to acknowledge that the equipment has been delivered and is acceptable for it's intended purpose. Many lease agreements state that the actual lease term commences once this document has been signed. -top-

Chattel Mortgage: A mortgage relating to personal property (see definition below) rather than real estate. A mortgage on equipment is a chattel mortgage. -top-

CICA: Canadian Institute of Chartered Accountants. A body established to regulate the standards and practices of chartered accountants in Canada. -top-

Closed-End Lease: Usually in reference to a vehicle lease, this is an agreement that does not require a purchase or residual payment at the end of the base term. Because the lessee is not guaranteeing the future value of the asset, the lessor takes a greater degree of risk in the long-term value of the goods. The lessee would have the option to return the goods to the lessor at the end of the initial lease term. Sometimes referred to as a 'walk-away' lease. -top-

Collateral: Security for the repayment of a debt obligation. In a typical lease, the collateral is the leased equipment. A cash security deposit or a Personal Guarantee may also be considered as Collateral. -top-

Commencement date: The date the base or primary lease term begins. -top-

Commercial Paper: Short-term unsecured promissory notes sold by large businesses in order to raise cash. Unlike most other money market instruments, commercial paper has no developed secondary market. -top-

Common Share: A claim of ownership in a corporation. Common shares have no maturity date, but exist as long as the firm does. -top-

Compensating Balance: The amount of funds that a bank requires a borrower to keep on deposit during the term of a loan. The amount of this non-interest earning deposit is typically based upon some percentage of the loan and effectively increases the borrower's interest cost. -top-

Compound Interest: The situation in which interest is paid on the investment during the first period is added to the principal and, during the second period, interest is earned on the original principal plus the interest earned during the first period. -top-

Conditional Sale Lease: A lease that in substance is a conditional sale (sometimes called a hire-purchase agreement). -top-

Conditional Sales Agreement: A contract where the seller retains title to the asset until the buyer fulfils all specified conditions, such as installment payments. Once all payments and conditions have been met, title automatically transfers to the buyer. -top-

Conglomerate: A multifaceted corporation involved in a variety of products and services. -top-

Consumer: A person who is offered, acquires, or uses a good or service, primarily for personal, family, or household purposes. -top-

Consumer Goods: Goods that are used primarily for personal, family or household purposes. -top-

Contingent Rental: Any payment or portion of a payment that will become due based on some event or factor other than the passage of time. Example: Charges due for metered usage of equipment as in a cost-per-copy or mileage charge. -top-

Contract: A legal agreement whereby two or more parties agree to the terms and conditions under which goods or services or other units of value will be exchanged. Although a contract can be formed verbally, the term often refers to a documented version of an agreement. -top-

Corporation: An entity that legally functions separate and apart from its owners. -top-

Cost of Capital: Capital is the funds a company invests in assets or business projects for an expected future return. Cost of Capital is the weighted-average cost of funds that a firm secures from both debt and equity sources. These costs may include interest on bank loans and bond issues, dividends on preferred shares, as well as commissions or fees paid for stock issues, among others. The use of a firm's Cost of Capital is essential in making accurate capital budgeting and project investment decisions. -top-

Cost of Money: Commonly, the cost that a lessor incurs to borrow money for investment in leases. This includes the interest rate and any additional cost related to such borrowing, such as fees or compensating balances. In pricing a lease transaction, a lessor factors this cost into the computation. -top-

Coverage Ratios: A group of ratios that measure a firm's ability to meet its recurring fixed charge obligations, such as interest on long-term debt, lease payments, and/or preferred share dividends. -top-

Credit Scoring: The numerical evaluation of credit applicants where the score is evaluated relative to a predetermined standard. -top-

Creditor: A person or entity to whom a liability or obligation of payment or performance is owed. -top-

Current Assets: All assets that a firm expects to convert into cash within a year, including cash, marketable securities, accounts receivable, and inventories. -top-

Current Ratio: Current assets/current liabilities. A ratio that indicates a firm's degree of liquidity by comparing its current assets to its current liabilities. -top-

Debt Ratio: Total liabilities/total assets. A ratio that measures the extent to which a firm has been financed with debt. -top-

Debtor: A person or entity who has a liability or obligation of payment or performance to another party. A lessee would be considered a debtor under a lease agreement. -top-

Default: A lessee who breaches certain material obligations under a lease agreement is said to be "in default". -top-

Delivery and Acceptance Certificate: see Certificate of Delivery and Acceptance. -top-

Depreciation: A means for a firm to recover its investment in a purchased asset over time, through periodic deductions or offsets to income. Depreciation or amortization is used in both a financial reporting and tax context and is considered a tax benefit because the deduction (capital cost allowance) causes a reduction in taxable income, thereby lowering a firm's tax liability. -top-

Direct Financing Lease: A lease by a lessor who is not an equipment manufacturer or dealer, in which the lease meets any of the criteria of a capital lease, plus certain additional criteria. -top-

Discounted Lease: A lease in which the lease payments are assigned to a funding source in exchange for up-front cash to the lessor. -top-

Early Termination: Occurs when the lessee returns the leased equipment to the lessor prior to the end of the lease term, as permitted by the original lease contract or subsequent agreement. At times, this may result in a penalty to the lessee. -top-

EBIT: Common financial notation for "earnings before interest and taxes." -top-

Economic Useful Life: The estimated period during which the property is expected to be economically useful by one or more users, with normal repairs and maintenance, for the purpose for which it was intended. -top-

Effective Lease Rate: The effective rate (to the lessee) of cash flows resulting from a lease transaction. To compare this rate with a loan interest rate, a company must include in the cash flows any effect the transactions have on income tax liabilities. -top-

End-of-Term Options: Options stated in the lease agreements that give the lessee flexibility in its treatment of the leased equipment at the end of the lease term. Common end-of-term options include a right to purchase the equipment, extend the lease term, trade for a different model, or return the equipment. -top-

Equipment Schedule: A portion of the lease agreement that describes in detail the subject assets to be leased. It may also include where the equipment is to be located, and other details regarding the lease such as payment amounts, lease term, etc. -top-

Equipment Specifications: A specific description of a piece of equipment that is to be acquired on a lease basis including, but not limited to, equipment make, model, configuration and capacity requirements. -top-

Event of Default: An event that provides the basis for the declaration of default. For example, the non-payment of rent under a lease agreement is typically prescribed as an event of default that gives the lessor the right to pursue permitted remedies, such as terminating the lease and reclaiming the equipment. -top-

Exposure: The total amount of capital a lender has granted or extended to a borrower. For example, a bank that has loaned a company $50,000 for vehicles and has also granted a $50,000 line of credit has $100,000 of exposure with that company. -top-

F. & L. Abbreviation for 'First and Last' payments. See also Advance Payments. -top-

Factoring of Accounts Receivable: The outright sale of a firm's accounts to another party (the factor) without recourse. The factor, in turn, bears the risk of collection. -top-

FASB: Financial Accounting Standards Board. A governing body established to regulate the standards and practices of financial accountants in the USA. -top-

Fair Market Value: The value of an asset if it were to be sold in a legitimate transaction determined to be at arm's length, between a willing buyer and a willing seller, for equivalent property and under similar terms and conditions. -top-

Finance Lease: A financing device whereby a user can acquire use of an asset for most of its useful life. Rentals are net to the lessor, and the user is responsible for maintenance, taxes, and insurance. Rent payments over the life of the lease are sufficient to enable the lessor to recover the cost of the equipment plus a return on its investment. -top-

Financial Analysis: The assessment of a firm's financial condition or well being. Its objectives are to determine the firm's financial strengths and to identify its weaknesses. The primary tool of financial analysis is the financial ratio. -top-

Financial Institution Lessor: A type of independent leasing company that is owned by, or is a part of, a financial institution such as a commercial bank, insurance company, or credit union, etc. -top-

Financial Structure: The mix of all funds sources that appear on the right-had side of the balance sheet. -top-

Financing Statement: A notice of a security interest filed under the Personal Property Securities Act Registry. The statement advises future interested parties who contact the registry, that the debtor in question may not have clear title to specific goods. -top-

Fixed Costs: Charges that do not vary in total amount as sales volume or the quantity of output changes over some relevant range of output. -top-

FMV: A common abbreviation for Fair Market Value. -top-

Full-Payout Lease: A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value. -top-

Full-Service Lease: A lease that includes any additional services such as maintenance, insurance and property taxes that are paid for by the lessor, the cost of which is built into the periodic lease payments. Also called Bundled Lease. -top-

Funding Source or Funder: An entity that provides any part of the funds used to pay for the cost of the leased equipment. Funds may come from either an equity-funding source, such as the ultimate lessor in a lease transaction, or a debt-funding source such as a bank or other lending institution providing the necessary capital to the lessor. -top-

Future Value: The value in future dollars of today's payment compounded to the future at the required rate of return. -top-

GAAP or Generally Accepted Accounting Principals: Accounting practices which have been standardised and codified in the accountants' handbook (CICA in Canada or FASB in USA), or which are in common usage. -top-

General Partnership: A partnership in which all partners are fully liable for the indebtedness incurred by the partnership. -top-

Goods and Services Tax (GST): A national valued-added tax imposed on the taxable supply of goods and services provided in Canada. Supply is defined to include sale, transfer, barter, exchanges, license, rental, lease, gift or disposition. -top-

GST: See Goods and Services Tax. -top->

Guaranteed Residual Value: A situation whereby the lessee or an unrelated third party (e.g. equipment manufacturer, insurance company) guarantees to the lessor that the leased equipment will be worth a certain fixed amount at the end of the lease term. The guarantor agrees to reimburse the lessor for any deficiency realised if the leased equipment is subsequently salvaged at an amount below the guaranteed residual value. This situation may also be referred to as an Open-End lease. -top-

Hedging Principle: A working capital management policy which states that the cash flow generating characteristics of a firm's investments should be matched with the cash flow requirements of the firm's sources of financing. Very simply, short-lived assets should be financed with short-term sources of financing while long-lived assets should be financed with long-term sources of financing. -top-

Hell-or-High-Water Clause: A clause in a lease which reiterates the unconditional obligation of the lessee to pay rent for the entire term of lease, regardless of any event affecting the equipment or any change in the circumstances of the lessee. -top-

HST: Harmonized Sales Tax. A combined Federal and Provincial value-add tax imposed on the taxable supply of goods and services provided in Newfoundland, New Brunswick, and Nova Scotia. -top-

Income Statement: A basic accounting statement that measures the results of a firm's operations over a specified period commonly one year. Also known as the profit and loss statement. The bottom line of the income statement shows the firm's profit or loss for the period. -top-

Incremental Cash Flows: The cash flows that result from the acceptance of a capital-budgeting project. -top-

Indemnity Agreement: A contract in which one party commits to insure or protect another party against anticipated and/or specified losses. -top-

Independent Lessor: A type of leasing company that is independent of any one manufacturer, and, as such purchases equipment from various unrelated manufacturers. The equipment is leased to the end-user or lessee. This type of lessor is often referred to as a 'third-party' lessor. -top-

Initial Direct Costs: The costs incurred by a lessor directly associated with negotiating and executing a specific lease transaction (i.e. inspections, legal, documentation and registration fees etc.) -top-

Insolvency: The inability to meet interest payments or to repay debt at maturity. -top-

Installment Sale: An installment sale occurs when a vendor transfers ownership and possession to the purchaser immediately. The purchaser agrees to make payments over a period of time. An installment sale is not a lease or a conditional sales contract. -top-

Insured Value: A schedule included in a lease which states the agreed value of equipment at various times during the term of the lease, and establishes the liability of the lessee to the lessor in the event the leased equipment is lost or rendered unusable during the lease term. -top-

Internal Rate of Return (IRR): The unique discount rate that equates the present value of a series of cash inflows (i.e. lease payments) to the present value of the cash outflows (equipment or investment cost). IRR is the most common method used to compute yields and returns on annuity type investments. -top-

Inventory Turnover Ratio: Cost of goods sold / inventory. A ratio that measure the number of times a firm's inventories are sold and replaced during the year. This ratio reflects the relative liquidity of inventories. -top-

Investor's Required Rate of Return: The minimum rate of return necessary to attract an investor to purchase or hold a security. -top-

Lease Agreement: A contract in which one party; the lessor, transfers the possession and use of an asset to another party, the lessee, for a specific period of time at a predetermined rental rate. -top-

Lease Rate: The periodic rental payment to a lessor for the use of the subject asset. -top-

Lease Term: The lease term is the fixed non-cancellable term of the lease plus: all periods covered by bargain renewal options; all periods for which failure to renew would impose on the lessee a penalty sufficiently large that renewal appears reasonably assured; all periods covered by ordinary renewal options where the lessee has undertaken to guarantee the lessor's debt related to the leased property; all periods covered by ordinary renewal options preceding the date on which a bargain purchase option is exercisable; and all periods representing renewals or extensions of the lease at the lessor's option. -top-

Lessee: The party granted certain rights, including possession and use of an asset, that is the subject of a lease agreement. The lessee normally makes periodic payments to the lessor in exchange for the right of use. -top-

Lessee's Incremental Borrowing Rate: The interest rate that, at the inception of the lease, the lessee would have incurred to borrow (using similar terms) to purchase the leased asset. -top-

Lessor: The owner and party granting use of an asset that is the subject of a lease agreement. The lessor normally grants rights to use an asset in exchange for periodic rental payments. -top-

Leverage: Achieving a greater possible return by using funds from another party or parties are used to increase the available amount of investment capital. A lease is sometimes referred to as 100% leverage for a lessee when they do not make a down payment. -top-

Leverage Ratios: Financial ratios used to measure the extent of a firm's use of borrowed funds calculated using information found in the firm's balance sheet. -top-

Leveraged Lease: A specific form of lease involving at least three parties: a lessor, lessee and a funding source. The lessor borrows a significant portion of the equipment cost by assigning the future lease payment stream to the lender in return for up-front funds (the borrowing). The lessor also puts up an amount of its own equity funds and is generally entitled to the full tax benefits of the equipment ownership. -top-

Lien: A legal notice or registration of interest in property, or the right to hold another party's property until a claim is met. -top-

Line of Credit: Generally an informal agreement or understanding between the borrower and the bank as to the maximum amount of credit the bank will provide the borrower at any one time. Under this type of agreement there is no "legal" commitment on the part of the bank to provide the stated credit. -top-

Liquidity: A firm's ability to pay its bills on time. Liquidity is related to the ease and quickness with which a firm can convert its non-cash assets into cash, as well as the size of the firm's investment in non-cash assets vis-a-vis it's short-term liabilities. -top-

Liquidity Ratios: Financial ratios used to assess the ability of a firm to pay its bills on time. Examples of liquidity ratios include the current ratio and the acid test ratio. -top-

Loan Amortization Schedule: A breakdown of the interest and principle payments on an amortized loan. -top-

Long-Term Debt to Total Capitalization Ratio: A leverage ratio indicating the extent to which a firm has used long-term debt in its permanent financing. -top-

Maintenance Contract: An agreement whereby the lessee contracts with another party to maintain and repair the leased property during the lease term, in exchange for a payment or stream of payments. Maintenance is not normally included in a lease unless it is a bundled lease, or a provision for maintenance has been included in the base lease cost. -top-

Marginal Tax Rate: The tax rate that would be applied to the next dollar of income. -top-

Master Lease: A lease line of credit that allows a lessee to obtain additional leased equipment under the same basic lease terms and conditions as originally agreed to, without having to renegotiate and execute a new lease contract with the lessor. This structure is useful when several items are to be leased from different suppliers and/or they will be delivered to the lessee over a period of time. The actual lease rental payment for each specific piece of equipment will generally be set up on delivery of the asset to the lessee, but will be in accordance with a predetermined formula. -top-

Matching Principle: Principle of accounting in which expenses are matched with revenues. -top-

Mid-Ticket: A leasing industry market segment generally represented by individual transactions valued at over $100,000 but less than $1 Million. -top-

Minimum Lease Payments: The minimum periodic rental payments called for by the lease over the lease term plus: any guaranty by the lessee of the residual value of the leased property at the end of the lease term; any penalty required to be paid by the lessee for failure to renew or extend the lease at the end of the lease term. If a bargain purchase option exists, then only the minimum rental payments and the bargain purchase option are included in the lease payments. -top-

Mortgage: An arrangement whereby a lender (mortgagee) acquires a lien on property owned by another party (mortgagor) as security for the loan repayment. Once the debt obligation has been fully satisfied, the mortgage lien is terminated. Mortgage agreements are most commonly used to finance the acquisition of real estate. -top-

Multinational Corporation: A corporation with holdings and/or operations in more than one country. -top-

Mutually Exclusive Projects: A set of projects where the selection of one will automatically mean the rejection of others. -top-

Net Income: A figure representing the firm's profit or loss for the period. It also represents the earnings available to the firm's common and preferred shareholders. -top-

Net Lease: A lease arrangement, in which the lessee pays all costs such as maintenance, certain taxes, and insurance, related to using the leased asset. Those costs are not included as part of the rental payments and may be paid by the lessee or by the lessor on behalf of the lessee at the lessee's additional expense. Typically, finance leases are net leases. -top-

Net Present Value: The value of all cash inflows and outflows from a project or investment when discounted at the desired interest or yield rate. -top-

Net Working Capital: The difference between the firm's current assets and it's current liabilities. -top-

Non-Payout Lease: A lease arrangement that does not (over the base term of the lease) generate enough cash flow to return substantially all the lessor's investment debt, financing costs and sales and administration expenses. -top-

Non-Recourse: A transfer of rights or responsibilities where the party transferring is free from future liabilities or risk. A type of borrowing in which the borrower (a lessor in the process of funding a lease transaction) is not at-risk for the borrowed funds. The lender expects repayment from the lessee and/or the value of the leased equipment; hence, the lender's credit decision will be based upon the creditworthiness of the lessee, as well as the expected value of the leased equipment. -top-

Open-end Lease: Usually in reference to a vehicle lease. This is a lease arrangement where the lessee is liable for any loss in future resale value incurred by the lessor as a result of devaluation of the asset beyond reasonable use and normal wear and tear. In an open-end lease, the lessee takes the risk that the future resale value of the asset will not be less anticipated and agreed. -top-

Operating Lease: A form of lease which does not transfer substantially all the benefits and risks of ownership of an asset. The lessor may also commit to provide certain additional asset related services, other than the straight financing such as maintenance, repairs, or technical advice. Generally, operating leases are much shorter in term than the expected useful life of the asset. Often referred to as a "true lease". -top-

Opportunity Cost of Capital: The projected benefits from one investment that is lost because the necessary capital is invested in an alternative project. -top-

Option: A contractual right that can be exercised by a specified party, under the terms of the agreement. For example, a Fair Market Value purchase option in a lease is the lessee's right to buy the subject asset for its Fair Market Value. -top-

Payments in Advance: A payment stream in which each periodic payment is due at the beginning of each period rather than at the end, or in arrears. Most lease agreements are based on advance payments. -top-

Payments in Arrears: A payment stream in which each periodic payment is due at the end of each period rather than at the beginning. Loan payments are often made in arrears. -top-

Payout: Occurs when the lessee makes a lump sum payment to settle any remaining payment obligations and terminate the agreement prior to the end of the lease term. -top-

Personal Property: Any goods, products, merchandise, assets, possessions, etc., which are not considered to be real property (real estate), regardless of whether they are owned by a company or an individual. Includes money, securities, documents of title, intangible goods, but does not include building materials that have been affixed to real estate. -top-

Pledging Accounts Receivable: A loan the firm obtains from a commercial bank or finance company using its accounts receivable as collateral. -top-

Point: One percent or one percentage point (1.00%). A point also represents 100 basis points. -top-

PPSA: The Personal Property Security Act. A Provincial statute which provides a public registration system permitting creditors and the owners of equipment and vehicles to register and post notice of their interest in such assets. A central registry for checking if a company or individual has clear title to certain assets or goods. -top-

Present Value: The discounted value of a payment or stream of payments to be received in the future, taking into consideration a specific interest or discount rate. Present Value represents the sum of a series of future cash flows expressed in today's dollars. -top-

Primary Lease Term: The same as Base Lease Term. -top-

Principle of Self-Liquidating Debt: See Hedging Principle. -top-

Proceeds: Identifiable or traceable funds or personal property arising from any transaction, exchange or dealings with collateral. -top-

Profit and Loss Statement: See Income Statement. -top-

Pro Forma Financial Statement: A statement which depicts the end result of forecasting a period's operations. -top-

Pro Forma Income Statement: A statement of planned profit or loss for a future period. -top-

Prospectus: A condensed version of the full registration statement filed with the Securities Commission that describes a new security issue. -top-

Public Offering: Case where a corporation give both individual and institutional investors the opportunity to purchase securities. -top-

Purchase Money Security Interest (PMSI): A security interest in goods or other personal property, taken for giving value in exchange for acquiring rights or ownership of collateral, and/or securing payment of the purchase price for such goods or property. -top-

Purchase Option: An option in the lease agreement giving the lessee the right to purchase the leased equipment at the end of the lease term for either a fixed amount or at the future fair market value of the leased equipment. In order to protect the tax characteristics of a 'true' lease, any option to purchase property from a lessor by a lessee cannot be at a price less than its fair market value at the time the right is exercised. -top-

PUT Option: Purchase Upon Termination. An agreement within the provisions of a lease, that the lessee will purchase the asset at a particular time and for a predetermined price. It represents a lessor's right to require the lessee (or some third party) to purchase the asset at the end of the lease term. -top-

Ratio Analysis: A method of making meaningful comparisons between a firm's financial data at different points in time with that of other firms. For example, examination of the average collection period, the ratio of receivables to assets, the ratio of credit sales to receivables, and the amount of bad debts relative to sales over time. -top-

Recourse: A type of borrowing in which the lender has additional protection in the form of a guarantee or contingent liability from a third party, should the borrower not fulfil its obligations. -top-

Refundable Security Deposit: An amount paid by the lessee to the lessor as security for fulfilment of all obligations outlined in the lease agreement that is subsequently refunded to the lessee once all obligations have been satisfied. Security deposits are typically returned at the end of the lease term but according to mutual agreement can be refunded at any point during the lease. -top-

Re-Marketing: The process of selling or re-leasing an asset to a party other than the original lessee upon termination of the original leases term. The lessor can re-market the equipment, or may contract with another party, such as the manufacturer, to re-market the equipment. -top-

Renewal Option: An option in the lease agreement that allows the lessee to extend the lease term for an additional period of time beyond the expiration of the initial lease term, in exchange for lease renewal lease payments. -top-

Repudiation: Occurs when a lessee rejects the authority or validity of the lease contract. Similar to a default situation. -top-

Residual Value: Any amount of the leased equipment's original capital cost that is not fully amortized or recovered within the repayment term of the lease. The value, either actual or expected, of leased equipment at the end or termination of the lease. -top-

Restrictive Covenants: Provisions in the loan agreement that place restrictions on the borrower and make the loan immediately payable and due when violated. These restrictive covenants are designed to maintain the borrower's financial condition on par with that which existed at the time the loan was made. -top-

Return on Equity Ratio: A profitability ratio that measures the rate of return earned on the shareholder's investment. -top-

Right of First Refusal: The right of the lessee (or another designated party) to buy the lease equipment, or renew the lease, at the end of the lease term, for an amount equal to that offered by an unaffiliated third party.-top-

Risk Premium: The additional return expected for assuming risk. -top-

Rule of 78's: An accelerated method of allocating periodic earnings in a debt agreement based upon the sum-of-the-years method. A higher proportion of principal repayment is allocated to the later payments while the lender's interest income is collected more quickly from the earlier payments. -top-

Sale-Leaseback: A transaction that involves the sale of equipment to a leasing company, and the subsequent lease of the same equipment back to the original owner who continues to use the equipment. The lessee receives the proceeds of the sale of the asset up front, and makes periodic payments to the lessor over the lease term. -top-

Sales-Type Lease: A lease by a lessor who is a manufacturer or dealer, in which the lease meets the definitional criteria of a capital lease or direct financing lease. -top-

Salvage Value: The expected or realised value from selling a piece of equipment when it is no longer required. -top-

Secured Credit: Sources of credit that require security in the form of pledged assets. In the event the borrower defaults in payment of principal or interest the lender can seize the pledged assets and sell them to settle the debt. -top-

Share Capital: All outstanding common and preferred shares. -top-

Short-Term Lease: A lease where the initial or base term is less than the full useful economic life of an asset. Generally refers to an operating lease. -top-

Skipped-Payment Lease: A lease that contains an unequal payment stream where payments are not made (or are substantially reduced) during certain periods of the lease term. Also called a "Skip Lease". Most often occurs where there is a seasonal element to the lessee's anticipated income and/or repayment ability. -top-

Small Ticket Leasing: A leasing industry market segment generally representing individual transactions valued at less than $100,000. -top-

Sole Proprietorship: A business owned by a single individual. -top-

Special Purpose Property: Property that is uniquely valuable to the lessee and not valuable to anyone else except as scrap. -top-

Spread: The difference between two values. In lease transactions, the term is generally used to describe the difference between the lease interest rate and the interest rate on the lessor's debt used to finance the leased equipment. -top-

Statement of Changes in Financial Position: A basic accounting statement which identifies the firm's sources and uses of cash flows over a period of time. -top-

Step-Payment Lease: A lease that contains an unequal payment stream requiring the lessee to make payments that either increase (step-up) or decrease (step-down) in amount over the term of the lease. -top-

Stipulated Loss Value: The same as Insured Value. -top-

Straight-Line Depreciation: A method of depreciation (for financial reporting and tax purposes) where the owner of the equipment claims an equal amount of depreciation in each year of the equipment's recovery period. -top-

Stretch Lease: An agreement whereby the lessee has the option, at the end of the primary lease term, to either extend the lease term or purchase the asset. Where lessee elects to extend the lease term, they may lose their right to purchase the equipment or be faced with purchasing at fair market value. The present value of the extended rent is usually on par with the value of the purchase price. -top-

Sub-Lease: A transaction in which leased property is re-leased by the original lessee to a third party, and the lease agreement between the two original parties remains in effect. -top-

Sum-Of-The-Years Digits Method: A method of accounting for the amortization of original principal such that large amounts of interest accrue in the earlier periods of the agreement and smaller amounts accrue in later periods. The annual rate of principal accrual is calculated by dividing the sum of all the periods in the agreement into the number of periods remaining in the agreement. The rate times the original principal amount equals the amount of original principal that has been amortized. -top-

Synthetic Lease: A synthetic lease is basically a financing structured as a lease for accounting purposes, but as a loan for tax purposes. The structure is used by corporations that are seeking off-balance sheet reporting of their asset-based financing, and that can efficiently use the tax benefits of owning the financed assets. -top-

Tax Lease: A lease where the lessor gains certain benefits from tax incentives provided by tax law to encourage investment in equipment. Generally the lessor passes the benefits on to the lessee in the form of a reduced lease rate as an incentive or inducement. -top-

Tax Liability: The amount owed the federal, provincial, or municipal taxing authorities. -top-

Taxable Income: Gross income from all sources, except for allowable exclusions, less any tax-deductible expenses. -top-

Term Loans: Loans that have maturities of one to ten years and are repaid in periodic installments over the life of the loan. A chattel mortgage on equipment or a mortgage on real property usually secures term loans. -top-

Third-Party Lessor: An independent leasing company, or lessor, that writes leases involving three parties: (1) The unrelated manufacturer, 2) The independent lessor and 3) The lessee. -top-

Ticket Size: Refers to the cost of the equipment being leased. The leasing market place is roughly segmented into the small, middle and large ticket markets. Definitions of each category may vary from lessor to lessor. -top-

TRAC Lease: A tax-oriented lease structure for motor vehicles and/or trailers that contains a Terminal Rental Adjustment Clause and otherwise complies with the guidelines to be classified as a lease for tax purposes. -top-

Trade Credit: Credit made available by a firm's suppliers in conjunction with the acquisition of materials. Trade credit appears on the balance sheet as accounts payable. -top-

Transaction Loan: A loan where the proceeds are designated for a specific purpose - for example, a bank loan used to finance the acquisition of a piece of equipment. -top-

Trend Analysis: An analysis of a firm's financial ratios over time. -top-

True Lease: An arrangement that qualifies as a lease for income tax purposes. Under a true lease, the lessee may deduct the rental payment expenses from taxable income, and the lessor may claim the tax benefits accruing to an equipment owner. -top-

Unleveraged Lease: A lease in which the lessor pays 100% of the equipment's acquisition cost from its own funds.-top-

Unsecured Credit: All sources of credit that have as their security only the lender's faith in the borrower's ability to repay the funds when due. -top-

Useful Life: Commonly, the period of time for which an asset is useful or productive. Also known as the Economic Useful Life of an asset. -top-

Upgrade: An option that allows the lessee to exchange or replace a leased asset with a similar but more serviceable asset in order to increase capacity, improve efficiency, or avoid obsolescence. -top-

Variable Costs: Charges that vary in total as output changes. Variable costs are fixed per unit of output. -top-

Vendor: A seller of goods or property. Commonly, the manufacturer, distributor, or dealer of equipment. -top-

Vendor Leasing: Lease financing offered to an equipment end-user in conjunction with the sale of equipment. Vendor leases can be provided by the equipment vendor (manufacturer or dealer) or an independent third-party leasing company having a working relationship with the equipment vendor, and are generally offered to stimulate sales. -top-

Venture Capitalists: Investors interested in supplying capital to particularly high-risk situations, such as start-ups or firms denied conventional financing. -top-

Working Capital: A concept traditionally defined as a firm's investment in current assets. Net working capital refers to the difference between current assets and current liabilities. -top-


Westport Leasing Corporation
11198 - 84th Avenue Box 33026
Delta, B.C. CANADA V4C 2L7

Phone: (604) 681-1260 | Fax: (604) 681-1680