Finance Lease of Equipment

EFA: An EFA, or equipment finance agreement, is a type of business loan where the customer takes ownership of the equipment upfront, and then pays the lender monthly, annually or under a schedule agreed on by both parties. It's similar to financing a car.

Unlike an outright purchase or equipment secured through a standard loan, equipment under an operating lease cannot be listed as capital. It's accounted for as a rental expense. This provides two specific financial advantages: Equipment is not recorded as an asset or liability.

A finance lease is a way of providing finance effectively a leasing company (the lessor or owner) buys the asset for the user (usually called the hirer or lessee) and rents it to them for an agreed period. substantially all of the risks and rewards of ownership of the asset to the lessee.

Assets being leased are not recorded on the company's balance sheet; they are expensed on the income statement. So, they affect both operating and net income.

A lessee must capitalize a leased asset if the lease contract entered into satisfies at least one of the four criteria published by the Financial Accounting Standards Board (FASB). An asset should be capitalized if:The lease runs for 75% or more of the asset's useful life.

Leasing companies can make money when a lessee requests for an upgrade to the equipment they currently have or request for the lease contract to be modified. If the upgrade does not have a stand-alone value or is not readily removable, the leasing company will pay for the upgrade.

The equipment account is debited by the present value of the minimum lease payments and the lease liability account is the difference between the value of the equipment and cash paid at the beginning of the year. Depreciation expense must be recorded for the equipment that is leased.

The equipment account is debited by the present value of the minimum lease payments and the lease liability account is the difference between the value of the equipment and cash paid at the beginning of the year. Depreciation expense must be recorded for the equipment that is leased.

An EFA is simply a loan and security agreement by another name. Unlike a non-true lease, the transaction is stated to be in the nature of a loan or financing rather than a lease of personal property and an EFA is much clearer on its face as to the parties' intention.