Ionutzakis

allegro-cpa/cfa Wrote:
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> Do you guys have a good synopsis on the
> differences between the different types of leases?
> And effects on the cash flow statement and/or
> ratios.


I am going to use another example to illustrate this.

MT and TME are both construction companies. MT uses operational lease while TME uses financial lease.

MT reaches an agreement with SM Leasing to borrow an equipment for 5 years and is obligated to pay $10m annually as lease payments. This expense will be reflected in the operational section of the income statement. There will be no balance sheet effect. Cash flow statement will show cash outflow in the cash flow from operations section.

TME leased a similar equipment from SM leasing. Let's start from the balance sheet. The present value of the payments will be found by discounting them at interest rate that SM Leasing charges TME. This present value will be added to the liability section of the balance sheet and it will also reflect in the asset section of the balance sheet as an asset. Remember that there is no double counting here because assets are the total value of wealth controlled by the firm and it a combination of what the firm owns (equity) and owes (liabilities). The lease asset will be amortized over five years since the contract is for five years; this amortization will be expensed in the income statement and since this is a non cash expense, it will be adjusted in the cash flow from operations section just like depreciation. The liability that is paid will also flow through the income expense and in the cash flow from financing (please reconfirm) while interest expense paid on the lease will reflect in income statement as interest expense and in cash flow statement as cash outflow from either financing or operating.

This is just a bird's eyeview. Hope it helps and it is important to know when to classify a lease as operating or financing.

Good luck.