Calculations

This document covers non-accrual calculations, including Late Charge methods and Payoffs/Terminations. Some of these calculations will vary according to customization parameters established in Portfolio Maintenance [U0212].


Late Charge Methods

Payoff/Termination

Initial Direct Costs/Revenues

Net Present Value


Internal Rate of Return


Check Digit


Miscellaneous Calculations

 

Late Charges

Late charges are assessments charged to the lessee if a payment is not applied within a specified grace period following the payment's due date.

Late charges are automatically assessed by LeasePak during the normal income accrual process. Late charges are not assessed for a lease until accruals are run. A flag is set during end of period accruals to designate the lease as a potential candidate for late charges. In addition to running accruals, invoicing and invoice formatting must be run during end of period. The rationale is that late charges cannot be assessed until after the customer receives and has a chance to pay the initial invoice.

It follows that for a new lease, late charges are not calculated until at least one month after the lease is booked, even if a back dated commencement date is chosen.

Late charges may also be assessed or waived manually through the Assessment update [U0105]. The number of times late charges have been waived and the accumulated dollar amount waived are displayed on the Lease Inquiry report [R0905] for each lease.

Non-Pyramiding late charges can be assessed or not; based on charges applied to the previous months invoice. A flag in the RLS table, "Previous Late Charge (Y/N)", will allow assessments to be charged on delinquent invoices when the flag is set to "Y", this flag is automatically set during End of Period processes. Valid non-pyramiding supported methods are: FIX, PERC, PMAX, PMIN, PMNX.

Late charges are influenced by parameters established for portfolio and lease form code, as well as the LATE CHARGE METHOD for a given lease.

On Portfolio maintenance [U0212], Miscellaneous Customizations, three fields affect late charges:

When Lease Form codes are established on [U0721], data is entered in some or all of the following fields to affect late charge defaults:

For descriptions of each field, refer to the LATE CHARGE INFORMATION screen of Lease Form Codes [U0721].

Fifteen LATE CHARGE METHOD codes are available for Lease Form codes and for individual leases:

 

Payoff Methods

When terminating or paying off a lease, the base termination or payoff calculation is specified. The table below shows which payoff methods are compatible with each lease type.

Lease Type Payoff Methods Termination Methods
Precomputed CF3, EBV, FIX, G12, INV, NPV, PR, PRN, PV2, PVS, PVT, RES, RV, R78, SB, TAX, WO EBV, G12, INV, NONE, PV2, RV, TAX, WO
Simple Interest EBV, PRN NONE
Operating OPR INV, NONE
IBL IB IB

 

Descriptions of payoff method calculations are detailed below.

 

Initial Direct Costs/Revenues

Initial direct costs are incurred related to the negotiating and closing of lease transactions. Initial direct revenue is income due to the lessor at lease commencement. Initial direct costs and revenue may be amortized over the life of the lease or charged against income as incurred (at lease commencement) with a portion of unearned income equal to the IDC/IDR recognized as income in the same period (lease commencement).

Initial Direct Costs

When a new lease is booked, initial direct costs are automatically calculated and displayed on the payment option screen. They are also printed out on the New Lease Audit report [U0101A] and stored on the Master Financial (RLS) file. Initial direct costs consists of the sum of the following items:

Note that if a documentation fee is entered, the calculated percentage or fixed amount is not included in the total initial direct costs. If a documentation fee is not entered, the calculated percentage or fixed amount is added to the total initial direct costs. Documentation fees are an additional cost to the lessee. The calculated percentage/fixed amount does not affect the lessee's actual cost.

Two additional IDC elements are entered and tracked separately. They are not included in the Book IDC nor Tax IDC calculations. IDC1 is named Insurance Premium and IDC2, Notary Fee. Those field names may be customized. Both amounts are disbursed to a broker with a corresponding Disbursement Type code on the New Lease [U0101], Check Disbursal screen.

For leases with "*PX*" type accrual methods, the AMR2 IDC method IDC/IDR amortization will use the Income over the Lease Term. The Unearned Income will be equal to the Total Contract Receivable - Principal.

Leases with *PX* accrual methods will perform income adjustments during accruals so that the Total Income matches the Total Amount Received.

Earned IDC/IDR will be calculated as follows:

Unearned IDC/IDR amount * (Earned Income/Remaining Unearned Income)

Example:

12 month RPX0 lease
Commencement date 1/1/2001
Cost = $10,000.00
Rate = 10%
Monthly Payments = $1,100.00 for 12 month

First month
IDC_RATIO = 83.33/3200.00
Earned IDC = 1100*IDC_RATIO= 28.64

Second month
IDC_RATIO = 74.86/(3200.00 - 83.33)
Earned IDC = (1100 - 28.64)*IDC_RATIO= 27.11
Earned IDC will be calculated based on the interest earned in table below:

Due Date Payment Interest Principal Outst Principal
      10000.00
2/1/2002 1100.00 83.33 1,016.67 8,983.33
3/1/2002 1100.00 74.86 1025.14 7958.19
4/1/2002 1100.00 66.32 1033.68 6924.51
5/1/2002 1100.00 57.70 1042.30 5882.22
6/1/2002 1100.00 49.02 1050.98 4831.24
7/1/2002 1100.00 40.26 1059.74 3771.50
8/1/2002 1100.00 31.43 1068.57 2702.92
9/1/2002 1100.00 22.52 1077.48 1625.45
10/1/2002 1100.00 13.55 1086.45 538.99
11/1/2002 1100.00 4.49 1095.51 -556.51
12/1/2002 1100.00 -4.64 1104.64 -1661.15
1/1/2003 1100.00 2761.15 -1661.15 0
Unearned Income   3200.00  

In Mid-term Adjustments, Payoffs, Asset Add-On and Payment Reschedules, the remaining unearned income is adjusted based on the remaining contract receivable and the outstanding principal.

Using the above example, after 7/1/2002 is accrued, the Payment Schedule is $1000.00 and an additional two months is added to the term. Then the new remaining unearned income will be calculated as follows:

Due Date Payment Interest Principal Outst Principal
      10000.00
8/1/2002 1100.00 31.43 968.57 2802.93
9/1/2002 1100.00 23.46 976.64 1826.29
10/1/2002 1100.00 15.22 984.78 841.51
11/1/2002 1100.00 7.01 992.19 -151.48
12/1/2002 1100.00 -1.26 1001.26 -1152.74
1/1/2003 1100.00 -9.61 1009.61 -2162.35
2/1/2003 1100.00 -18.02 1018.02 -3180.37
3/1/2003 1100.00 4180.37 -3180.37 0
Unearned Income 4228.50

Earned IDC on 8/1/2002 = Unamortized IDC * 31.43/4228.50

The AMR2 IDC method with an *IF* type accrual method, will calculate that yield accordingly and allow comparison to the fixed rate entered.
The floating rate (Principal + Interest) Interest Bearing; IDC/IDR amortization uses income over lease term for IDC/IDR amortization. The estimated Unearned Income will be calculated and stored. Earned IDC/IDR will be calculated as follows:

Unearned IDC/IDR amount * (Earned Income/Remaining Estimated Unearned Income)

Both IDC1 and IDC2 are amortized following the rules according to the accrual type on the lease.

There are several options for the calculation of initial direct costs on LeasePak:

If a percentage is calculated, then the percentage may be applied to any of the following items:

The following items are established through the Portfolio update [U0212] New Lease:

 

Initial Direct Revenues

IDR is not a calculated total. Four fields on a new lease contain income amounts which are considered initial direct revenue.

 

Net Present Value

Net present value (NPV) is a mathematical calculation used in discounted cash flow analysis. It can be used to determine if an investment is profitable, or as a basis for comparing investment alternatives.

In general, the computation of net present value is as follows:

If the NPV is positive (greater than zero), the investment is financially attractive at the given discount rate. If the NPV is negative (less than zero), the investment is financially unattractive at the given discount rate. If the NPV is zero, the investment is neutral (neither attractive nor unattractive) at the given discount rate.

Specifically, the net present value calculation is as follows: Where NPV=

CF(1) + CF(2) +...+ CF(n)
(1+i) 1   (1+i) 2   (1+i) n

where, *n is the term, CF(0) is the initial cash outflow, CF(1) through CF(n) are the expected future cash flows, and *i is the periodic discount rate.

The net present value of the contract dollar amounts for each lease is calculated and displayed using cost of funds as the discount rate. The net present value is not calculated if cost of funds is zero. The calculation involves the following cash flow amounts:

 

Internal Rate Of Return

Internal rate of return (IRR) is a mathematical calculation used in discounted cash flow analysis. The computation of IRR is complex, involving a series of iterative calculations on a given cash flow. In each iteration, an estimate of IRR is used as the discount rate in a net present value calculation of the cash flows. Each iteration refines the estimate until the computed net present value is zero or very close to zero. Therefore, the internal rate of return can be thought of as the rate at which an investment is financially neutral.

When a lease is booked, three main IRR calculations are performed:

Yield

For precomputed leases, operating leases with fixed terms and some simple interest accrual methods, the lessor yield is calculated. This is the yield that, when used to amortize unearned income to earned income over the lease term, provides a constant periodic rate of return on the net investment in the lease. This yield is also referred to as level yield, implicit yield, constant yield, or the FASB method of income recognition yield. Refer to the Level Yield Accrual Method section for more information.

The calculation uses the following cash flows:

 

IRR with Residual

An internal rate of return on the lease cash flows, including any residual amount, is calculated. IRR with residual is not calculated for the VT and VV simple interest floating rate accrual methods because these require that the principal portion only of the lease payment be entered into the payment schedule. In these cases, IRR would be zero if there is no residual amount or negative if there is a residual amount.

The calculation uses the following cash flows:

 

IRR without Residual

An internal rate of return on the lease cash flows, excluding any residual amount, is calculated. Similar to IRR with residual, IRR without residual is not calculated for the VT and VV accrual methods.

The calculation uses the same cash flows as the IRR with residual calculation except that the residual amount, if any, is not included in the final inflow.

 

Check Digit

LeasePak has available an application/lease assignment method which utilizes a check digit number. This method enables LeasePak to calculate and record the check digit as part of the assigned lease number at lease booking. The application/lease number plus the check digit becomes the new number for the application/lease. That is, all access to the application/ lease requires the check digit number.

The check digit algorithm calculates a check digit based upon a number of up to nine digits and places the check digit calculation in the tenth position (the right most, or 'ones', position). The algorithm is as follows:

application_number/lease_number = abcdefghi

total =

(a * 3)+(b * 5)+(c * 7)+

(d * 13)+ (e * 17)+(f * 19)+

(g * 23)+ (h * 29) +(i * 31)

compare_total = total

if (total MOD 11) > 0 then

compare_total = (FIX (total / 11) + 1) * 11

check_digit = compare_total - total

if check_digit = 10 then

get next available application/lease number and try again

else application_number/lease_number = (abcdefghi * 10) + check_digit

where MOD returns the remainder in the calculation,
FIX returns the integer portion only of the answer.

 

Miscellaneous Calculations

The following are additional calculations performed by LeasePak:

 

Bad Debt

The allowance method of accounting for bad debt involves an estimation of future bad debt and enables a matching of future bad debt losses to the time at which the bad debt was incurred (i.e., the commencement of the lease).

LeasePak enables a percentage of the contract receivable to be recognized as an allowance for bad debt for each lease booked onto the system. This percentage may be defaulted at the vendor or the portfolio levels and may be changed at the lease level during lease booking.

The allowance for bad debt amount may be included in or excluded from the initial direct costs of the lease (refer to the Initial Direct Costs section of this document).

 

Net Investment

The net investment for a precomputed interest lease is calculated as follows:

CONTRACT RECEIVABLE
+ RESIDUAL
- UNEARNED INCOME (lessor + vendor + investor)

It may also be calculated as follows:

ACCRUED PRINCIPAL
+ SECURITY DEPOSIT
+ UNEARNED ITC INCOME

For simple interest leases, the net investment is:

ACCRUED PRINCIPAL

 

Unearned Income

Unearned income is the amount of income not yet recognized for the lease. It is calculated for precomputed interest leases and for VV and VL simple interest leases. For a precomputed interest lease, unearned income may consist of three components: lessor, vendor and investor income. The total unearned income for the lease is calculated as follows:

MINIMUM LEASE PAYMENTS RECEIVABLE
+ UNGUARANTEED RESIDUAL
- (ACQUISITION COST - DOWN PAYMENT)
- OTHER CHARGES
- INITIAL DIRECT COSTS (if included in the yield)

Vendor and investor portions of the unearned are calculated using the entered vendor and investor rates and the balance subject to lease charges. The balance subject to lease charges is calculated as follows:

ORIGINAL ACQUISITION COST
+ OTHER CHARGES
+ DOCUMENTATION FEE
- DOWN PAYMENT
+ RESIDUAL

The vendor and investor portions of the total unearned are calculated as follows:

BALANCE SUBJECT TO LEASE CHARGES
* VENDOR or INVESTOR RATE
* TERM

The lessor portion of the total unearned is calculated as follows:

TOTAL UNEARNED INCOME
- VENDOR UNEARNED INCOME
- INVESTOR UNEARNED INCOME

 

Capitalized Cost

Capitalized cost is the financed cost of the lease. It is calculated as follows:

ORIGINAL ACQUISITION COST
+ OTHER CHARGES
+ DOCUMENTATION FEES
- DOWN PAYMENT
+ BROKER FEES (if capitalized)

 

Monthly Rental Income

The monthly rental income is the average rental income accrued each month for the lease. It is calculated as follows:

MIN LEASE PAYMENTS
-CAPITALIZED COST
+UNGUARANTEED RESIDUAL
/LEASE TERM

The capitalized cost is calculated as follows:

ORIGINAL ACQUISITION COST
+ OTHER CHARGES
+ DOCUMENTATION FEE
+ BROKER FEE
- DOWN PAYMENT

The BROKER FEE is included only if it is capitalized.

Note: not applicable to operating leases.

 

Monthly Rental Depreciation

The monthly rental depreciation is the average monthly reduction of the net investment in the lease. It is calculated as follows:

(CAPITALIZED COST - RESIDUAL)/ TERM

 

Contract Rate

The contract rate is calculated as follows:

MONTHLY RENTAL INCOME
/ (CAPITALIZED COST + RESIDUAL)

 

Starting Accrued Principal

The starting accrued principal for a lease with a precomputed accrual method is calculated as follows:

ORIGINAL ACQUISITION COST
+ OTHER CHARGES
+ INITIAL DIRECT COSTS
- ADVANCE PAYMENTS
- DOWN PAYMENT
- SECURITY DEPOSIT
- INTERIM RENT

The initial direct cost amount is not included in this calculation if it is amortized over the life of the lease. It is only included if the entire initial direct cost amount is recognized in the first month of the lease. The method for initial direct cost recognition is determined by the parameter INITIAL DIRECT COST EXCLUDED FROM YIELD found on the first screen of the New Lease Customizations screen of the Portfolio update [U0212].

The interim rent is not included in this calculation if it is considered a one-time income item; that is, if the entire payment is recognized as income in the first month of the lease. It is only included if the income recognition from the interim rent is amortized over the life of the lease. The method of interim rent income recognition is determined by the INTERIM RENT (Y/ N) field in the Portfolio update [U0212NL].

The starting accrued principal for a lease with a simple interest accrual method is calculated as follows:

ORIGINAL ACQUISITION COST
+ OTHER CHARGES
+ INITIAL DIRECT COSTS
- ADVANCE PAYMENTS
- DOWN PAYMENT

The initial direct cost amount is not included in this calculation if it is amortized over the life of the lease. It is only included if the entire initial direct cost amount is recognized in the first month of the lease. The method for initial direct cost recognition is determined by the parameter INITIAL DIRECT COST EXCLUDED FROM YIELD found on the first screen of the New Lease Customizations screen of the Portfolio update [U0212].

 

LeasePak  Reference Guide

©  by McCue Systems Incorporated. All rights reserved.

The information contained in this document is the property of McCue Systems, Inc. Use of the information contained herein is restricted. Conditions of use are subject to change without notice. McCue Systems, Inc. assumes no liability for any inaccuracy that may appear in this document; the contents of this document do not constitute a promise or warranty.The software described in this document is furnished under license and may be used or copied only in accordance with the terms of said license. Unauthorized use, alteration, or reproduction of this document without the written consent of McCue Systems, Inc. is prohibited.