Accelerated Cost Recovery System
The tax depreciation, or cost recovery, method for Internal Revenue Service (IRS) purposes, which was introduced by the 1981 Economic Recovery Tax Act and was effective for all depreciable property placed in service after December 31, 1980 and before January 1, 1987. ACRS replaced the Asset Depreciation Range (ADR) system and was replaced itself by the Modified Accelerated Cost Recovery System (MACRS) of the 1986 Tax Reform Act.

Accelerated Depreciation
Any depreciation method that allows for greater deductions or charges in the earlier years of an assets depreciable life, with charges becoming progressively smaller in each successive period. Examples would include the double declining balance and sum-of-the-years digits methods

Add-On
A transaction to add related equipment/software to an existing lease. Typically this term is used when the new equipment is financed using the same lease structure (i.e. Fair Market Value, $1.00 Purchase Option, Fixed Purchase Option, etc.)

Advance Payments
Payments made by the Lessee at the inception of a leasing transaction (i.e. First and Last Payment)

Amortization
A breakdown of periodic loan payments into two components: a principal portion and an interest portion.

APR
Annual Percentage Rate: The effective rate taking into account compounding and other fees. The nominal rate of interest for a specific period (usually one year).

Basis Point
One one-hundredth of a percent (.01%)

Capital Lease
A lease that meets at least one of the criteria outlined in paragraph 7 of FASB 13 and, therefore, must be treated essentially as an installment purchase for book accounting purposes. The four criteria are

Title passes automatically by the end of the lease term.
Lease contains a bargain purchase option
Lease term is greater than 75% of estimated economic life of the equipment
Present value of lease payments is greater than 90% of the equipment's fair market value

A Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset and corresponding liability (lease payable). Periodic lessee expenses consist of interest on the debt and depreciation of the asset.

Captive Lessor
A leasing company that has been set up by a manufacturer or dealer of equipment to finance the sale or lease of its own products to its customers.

Certificate of Delivery and Acceptance
A document that is signed by the lessee to acknowledge that the equipment to be leased has been delivered and is acceptable.

Cost of Equity
The return of an investment required by the equity holders of a firm. Cost of equity can be calculated using any number of different theoretical approaches and must take into consideration the current and long-term yield requirements of a firm's investors. A firm's component cost of equity is used in calculating the firm's overall weighted-average cost of capital.

Cost of Capital
The weighted-average cost of funds that a firm secures from both debt and equity sources in order to fund its assets. The use of a firm's cost of capital is essential in making accurate capital budgeting and project investment decisions.

Coterminous
Two or more leases that are linked so that both will terminate at the same time.

Depreciation
A tax deduction representing a reasonable allowance for exhaustion, wear and tear, and obsolescence, that is taken by the owner of the equipment and by which the cost of equipment is allocated over time. Depreciation decreases the company's balance sheet assets and is also recorded as an operating expense for each period. Various methods of depreciation are used which alter the number of periods over which the cost is allocated and the amount expensed each period.

Discount Rate
A certain interest rate that is used to bring a series of future cash flows to their present value in order to state them in current, or today's dollars. Use of a discount rate removes the time value of money from future cash flows.

Early Termination
Early Termination of a lease occurs when the lessee pays off the balance of the lease prior to its maturity date or returns the lease equipment to the lessor prior to 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.

Economic Life of Leased Property
The estimated period during which the property is expected to be economically usable by one or more users, with nominal repairs and maintenance for the purposes for which it was intended at the inception of the lease.

Economic Recovery Tax Act (ERTA'81)
The federal tax act that introduced ACRS.

End-of-Term Options
Options stated in the lease agreement that give the lessee flexibility in its treatment of the leased equipment at the end of lease term. Common end-of-term options include purchasing the equipment, renewing the lease or returning the equipment to the lessor.

Equipment Schedule
A document incorporated by reference into the lease agreement, that describes in detail the equipment being leased. The schedule may state the lease term, commencement date, repayment schedule and location of the equipment.

Fair Market Value Lease
A lease which includes an option for the lessee to either renew the lease at a fair market value renewal or purchase the equipment for its fair market value at the end of the lease term. Though often referred to as tax lease, not all Fair Market Value leases qualify as tax leases.

Finance Lease
A lease used to finance the purchase of equipment; not a true lease. Finance leases are generally considered to be capital leases from an accounting perspective and non-tax leases from a tax perspective.

FASB 13
Statement number 13 of the Financial Accounting Standards Board (FASB) which establishes standards for lessees' and lessors' accounting and reporting for leases. This includes the characterization of a lease as an operating lease or capital lease for the lessee's purposes. A company's assets, liabilities and net income will differ depending on how it chooses to structure its leases. The provisions of FASB 13 derive from the view that a lease that transfers substantially all of the benefits and risks of ownership should be accounted for as the acquisition of an asset and the incurrence of an obligation by the lessee (a capital lease) and as a sale of financing by the lessor. Other leases should be accounted for as the rental of property (operating leases).

Fixed Purchase Option
An option given to the lessee to purchase the leased equipment from the lessor on the option date for a guaranteed price. Both the date and the price must be determined at the inception of the lease. A typical fixed purchase option is 10% of the original cost of the equipment.

Full Payout Lease
A lease in which the total of the lease payments pays back to the lessor the entire cost of the equipment including financing, overhead, and a reasonable rate of return, with little or no dependence on a residual value.

Lease
A contract through which an owner of equipment (the lessor) conveys the right to use its equipment to another party (the lessee) for a specified period of time (the lease term) for specified periodic payments.

Lease Schedule
A schedule to a Master Lease Agreement describing the leased equipment, rentals and other terms applicable to the equipment.

Master Lease
A continuing lease arrangement whereby additional equipment can be added from time to time merely by describing that equipment in a new lease schedule. The original lease contract terms and conditions apply to all subsequent schedules. In contrast to a lease contract for a single transaction involving a specific unit of equipment, a Master Lease is essentially a line of credit to draw from over time in order to purchase equipment.

Municipal Lease
A lease designed to meet the special needs of state and local governments. The lease contains a non-appropriation clause which states that the only condition under which the entity may be released from its payment obligation is when legislature or funding authority fails to appropriate funds. Since the lessee is a municipality or an organization supporting the government, it is exempt from paying federal income taxes. For this reason, the IRS does not charge the lessor income taxes on leases to these customers.

Net Present Value
The total discounted value of all cash inflows and outflows from a project or investment.

Off Balance Sheet Financing
A lease that qualifies as an Operating Lease for the lessee's financial accounting purposes. Such leases are referred to as off-balance sheet financing due to their exclusion from the balance sheet asset and debt presentation, except for that portion of the payments that is due in the current fiscal period. Full disclosure of such transactions is typically made in the auditor's notes to the financial statements. Periodic payments are recorded as expense items on the lessee's income statement.

Operating Lease
A lease which is treated as a true lease (as opposed to a loan) for book accounting purposes. As defined in FASB 13, an operating lease must have all of the following characteristics:

Lease term is less that 75% of estimated economic life of the equipment
Present value of lease payment is less than 90% of the equipment's fair market value.
Lease cannot contain a bargain purchase option (i.e. less than the fair market value).
Ownership is retained by the lessor during and after the lease term.

An operating lease is accounted for by the lessee without showing an asset (for the equipment) or liability (for the lease payment obligations) on his balance sheet. Periodic payments are accounted for by the lessee as operating expenses of the period.

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 a series of future cash flows expressed in today's dollars.

Purchase Option
An option given to the lessee to purchase the equipment from the lessor, usually as of a specified date.

Residual Value
The book value that the lessor depreciated a piece of equipment down to during the lease term, typically based on an estimate of the future values, less a safety margin.

Return on Assets (ROA)
A common measure of profitability based upon the amount of assets invested; ROA is equal to the ratio of either 1) net income to total assets or 2) net income available to common stockholders to total assets.

Return on Equity (ROE)
A measure of profitability related to the amount of invested equity; ROE is equal to the ratio of either 1) net income to owners' equity or 2) net income available to common stockholders to common equity.

Tax Lease
A generic term for a lease in which the lessor takes the risk of ownership (as determined by various IRS pronouncements) and, as the owner, is entitled to the benefits of ownership, including tax benefits.

UCC Financing Statement
A document, under the UCC, filed with the county (and sometimes the Secretary of State) to provide public notice of a security interest in personal property.

Upgrade
To trade in leased equipment for a newer, more advanced model during the lease term.

Useful Life
The period of time during which an asset will have economic value and be usable. The useful life of an asset is sometimes called the economic life of the asset. To qualify as an operating lease, the property must have a remaining in useful life of 25% of the original estimated useful life of the leased property at the end of the lease term, and at least life of one year.