Late Charges Payoff/Term IDR/IDC NPV IRR Check Digit Misc

Calculations

Covers non-accrual calculations, including Late Charge and Payoff/Termination methods.

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

• Introduction
• Yield
• IRR with Residual
• IRR without Residual

Check Digit

Miscellaneous Calculations

• Introduction
• Bad Debt
• Net Investment
• Unearned Income
• Capitalized Cost
• Monthly Rental Income
• Monthly Rental Depreciation
• Contract Rate
• Starting Accrued Principal

 

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:

• GRACE PERIOD IN DAYS
• Maximum number of days beyond due date until late charges are assessed for any lease in the portfolio. Determines the group of leases to accrue and invoice during end of day processing. This allows late charges to be calculated and assessed for all leases in the portfolio during accrual. For more information, see the field description in Portfolio maintenance [U0212].
• ASSESS LATE CHARGES TO LEASES LESS THAN 60 DAYS OLD
• If coded Y, late charges will be calculated for a lease during the first monthly accrual after the lease is booked. If coded N, late charges will not be calculated for the first two monthly accruals after the lease is booked.
• GRACE AMOUNT
• Minimum delinquent amount on which late charges should be assessed (Note that the LATE CHARGE GRACE AMOUNT on [U0721] is the minimum amount of calculated late charge which will be assessed.)

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

• LATE CHARGE METHOD
• LATE CHARGE PERCENTAGE
• MINIMUM CHARGE
• MAXIMUM CHARGE
• FIXED CHARGE
• PLACE LATE CHARGE ON DELINQUENT INVOICE (Y/N)
• LATE CHARGE GRACE AMOUNT
• GRACE DAYS (GFxx methods only)
• PROPERTY TAX LATE CHARGE METHOD
• PROPERTY TAX LATE CHARGE PERCENTAGE
• INCLUDE ASSESSMENTS IN LATE CHARGE CALC (Y/N)

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:

• NONE
• Suppress late charges for an individual lease by changing the LATE CHARGE METHOD at the lease level to NONE. Late charges may be suppressed for all leases written under a lease form by changing the LATE CHARGE METHOD at the lease form level to NONE.
• FIX
• The fixed charge specified on the Lease Form update [U0721] is assessed the first time a delinquent rental payment becomes eligible for late charges. A single late charge is assessed per past due invoice, regardless of the number of months it is actually delinquent. For example, given a 10 day grace period, an unpaid invoice due January 1 is assessed a late charge on January 11. That particular invoice is not assessed another late charge, even if it is still delinquent on February 11. (The invoice due February 1, however, is assessed a late charge on February 11, assuming it is delinquent.)
• OUTF
• The fixed charge specified on the Lease Form update [U0721] is assessed each time a delinquent rental payment becomes eligible for late charge calculations. For example, given a 10 day grace period, the invoice due January 1 is assessed a late charge on January 11. That invoice will be assessed a fixed amount late charge again if it remains delinquent on February 11.
• PERC
• A percentage of the rental amount delinquent is assessed. If a partial payment is applied, only the portion of the payment still outstanding is used for the late charge calculation. The percentage is specified through the Lease Form update [U0721]. A single late charge is assessed per past due invoice, regardless of the number of months it is actually delinquent. For example, given a 10 day grace period, the invoice due January 1 is assessed a late charge on January 11. That particular invoice is not assessed another late charge, even if it is still delinquent on February 11. (The invoice due February 1, however, is assessed a late charge on February 11, assuming it is delinquent.)
• OUTP
• A percentage, specified on the Lease Form update [U0721], of the portion of the rental payment still outstanding is assessed each time the delinquent amount becomes eligible for late charge calculation. For example, given a 10 day grace period, the invoice due January 1 is assessed a late charge on January 11. That invoice will be assessed a percentage late charge again if it remains delinquent on February 11.
• PMAX
• A percentage, specified on the Lease Form update [U0721], of the portion of the rental payment amount still outstanding is calculated and compared to the MAXIMUM CHARGE specified for the Lease Form code. The calculated amount is assessed unless it is greater than the maximum, in which case the maximum is assessed. A single late charge is assessed per past due invoice, regardless of the number of months it is actually delinquent.
• PMIN
• A percentage, specified on the Lease Form update [U0721], of the portion of the rental payment amount still outstanding is calculated and compared to the MINIMUM CHARGE specified for the Lease Form code. The calculated amount is assessed unless it is less than the minimum, in which case the minimum is assessed. A single late charge is assessed per past due invoice, regardless of the number of months it is actually delinquent.
• PMNX
• A percentage, specified on the Lease Form update [U0721], of the portion of the rental payment amount still outstanding is calculated and compared to both the MAXIMUM and MINIMUM CHARGE specified for the Lease Form code. The calculated amount is assessed unless it is greater than the maximum or less than the minimum, in which case the maximum or minimum is assessed. A single late charge is assessed per past due invoice, regardless of the number of months it is actually delinquent.
• PCON
• This method assesses late charges on both delinquent rental payments and property tax. The total late charge for this method is the sum of the rental late charge and the property tax late charge. For rental late charge, both a percentage and a fixed charge from the Lease Form code table [U0721] are used. The fixed charge may be added to the charge several times, once for each delinquency category as defined on the Portfolio maintenance [U0212], Miscellaneous Customizations, screen 3.
• The late charge calculation is:

  (LATE CHARGE PERCENTAGE/12 * TOTAL RENTAL AMOUNT DELINQUENT)
  +(FIXED CHARGE IF RENTALS IN DELINQUENCY CATEGORY 1)
  +(FIXED CHARGE IF RENTALS IN DELINQUENCY CATEGORY 2)
  +(FIXED CHARGE IF RENTALS IN DELINQUENCY CATEGORY 3)
  +(FIXED CHARGE IF RENTALS IN DELINQUENCY CATEGORY 4)

• For property tax, there is a 30-day grace period before late charges are assessed. The property tax late charge percentage rate is set through the Lease Form update [U0721]. After 30 days, late charge is calculated as follows:

  (PROPERTY TAX LATE CHARGE PERCENTAGE/12)
  *TOTAL PROPERTY TAX AMOUNT DELINQUENT
  *NUMBER OF MONTHS FOR WHICH PROPERTY TAX IS UNPAID

• The delinquent rental payment amount and the delinquent property tax amount are checked against a minimum GRACE AMOUNT established through the Portfolio update [U0212]. If either of the delinquent amounts is greater than the grace amount, late charges are assessed against the respective delinquent amount. The grace amount may be zero, if so desired.
• GFT0
• Late charge is calculated on rental amount (principal and interest) based on the actual number of days delinquent. Delinquent payment for assessments and recurring charges are not considered. An invoice is delinquent if the amount has not been fully paid by the expiration of the GRACE DAYS entered on [U0721]. Once an invoice is delinquent, late charges are assessed on the unpaid portion for each day that the payment is not paid, including the grace days.
• The following are factors in the late charge calculation:
  • Base percentage is the lease rate used for the interest accrual of the payment which is delinquent.
  • Add-on percentage is the contract rate, entered on the Book Lease option of the New Lease update [U0101].
  • Penalty add-on percentage is the LATE CHARGE PERCENTAGE entered on Lease Form update [U0721].
• The late charge calculation is:

  AMOUNT DELINQUENT
  * (BASE% + ADD-ON% + PENALTY ADD-ON%)
  /360 (number of days in year)
  * NUMBER OF DAYS DELINQUENT

• Late charges are assessed based on the previous month's activity. For example, given the following situation:

  current day = February 1
  grace period = 10 days
  payment due December 1 paid on January 4
  payment due January 1 still unpaid
  Late charges are assessed for 34 days:
  January 1 payment (31 days)
  December 1 payment (3 days)

• Late charges for 31days in December for the payment due January 1 were already assessed during the previous accrual. If the January 1 payment had been paid on or before January 11, no late charges would have been assessed. However, 3 days of late charges for the December 1 payment would still have been assessed. If the January 1 payment had been paid on January 12, 11 days of late charges would have been assessed.
• GFT5
• Calculation is the same as GFT0, except that the number of days in the year is 365.
• GFT6
• Calculation is the same as GFT0, except that the number of days in the year is the actual number, 365 or 366.
• GFL0
• Calculation is similar to GFT0, except that instead of BASE PERCENTAGE the system uses each day's floating rate for the lease's LATE CHARGE INDEX, as updated daily on the Base Rates table [U0705]. The LATE CHARGE PERCENT from the Lease Form table [U0721] is added to the floating rate. GFL0 does not add an ADD-ON% to the late charge rate.
• GFL5
• Calculation is the same as GFL0, except that the number of days in the year is 365.
• GFL6
• Calculation is the same as GFL0, except that the number of days in the year is the actual number, 365 or 366.

 

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.

Vehicle Finance users: valid methods for precomputed leases are INV, PRN, R78, and SB.

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.

• CF3
• This method is used for payoffs only. The net present value of the remaining payment stream is the base payoff. The payment stream is discounted using the cost of funds plus three percent (3%). Cost of funds is entered through the Book Lease option of the New Lease update [U0101] or the Master Financial update [U0202].
• EBV
• This payoff method is used for asset payoffs/terminations. With this method the user must enter the asset book value (as of the effective date of the payoff/termination) in the FMV field on the Payoff update screen [U0103]. The asset book value is the base payoff.
• The asset book value may be determined using either of two methods:
  • Model Amortization [R0109] may be run using a combination of asset and lease information (e.g., asset cost, asset residual, lease accrual method, lease yield, lease term and payment frequency). The Model will calculate the payment amount associated with the asset. This payment amount should be verified against physical records. Use the REMAINING NET INVESTMENT amount shown on the report for the appropriate date as the asset book value.
  • Note: This method should be used ONLY if the asset to be paid off/terminated originated with the lease on the commencement date. If the asset to be paid off/terminated was attached to the lease using the Asset Add-on update [U0113], the lease term will be inaccurate (overstated).
  • The asset book value may be determined by multiplying the ACCRUED PRINCIPAL of the lease by the PERCENTAGE OF SCHEDULE AMOUNT of the asset. The ACCRUED PRINCIPAL may be found in the Accrual Information section of the Lease Inquiry [R0905]. The PERCENTAGE OF SCHEDULE AMOUNT may be found in the Asset section of the Lease Inquiry [R0905].
• LeasePak allows for an alternate calculation for percent of schedule based on the weighted share of the total asset payment amount. Example: Three assets with an acquisition cost of $5000, $3000 and $2000. The payment amount entered for each asset is $40, $50 and $10. The total asset payment amount (PPA) percent would be 40%, 50% and 10% respectively. See the Miscellaneous Customizations option in the Custom General update [U0712].
• Note: The ACCRUED PRINCIPAL found in the Accrual Information section of the report is as of the current date. If the effective date of the asset payoff/ termination is to be backdated or future dated, use the following steps to attain the correct ACCRUED PRINCIPAL:
  • Select the Payoff option of the Lease Inquiry [R0905]
  • Enter a PAYOFF METHOD of INV
  • Enter the EFFECTIVE DATE
  • Enter FUTURE PMTS RECD (Y or N, if effective date is in the future)
• The BASE PAYOFF AMOUNT on the report is the ACCRUED PRINCIPAL as of the effective date entered.
• FIX
• This method is used for payoffs only. This payoff calculation method always uses the Fixed Price Purchase amount entered during the New Lease Booking process as the base payoff, regardless of whether the lease is matured. In effect this method provides the ability to calculate manually and quote a special payoff amount. To do this, the payoff amount would be calculated by the user and entered as the Fixed Price Purchase amount (through the Master Financial update [U0202]). Then, when quoting or processing the payoff, the FIX payoff calculation method should be entered.
• Note: A warning message displays if the user enters a PAYOFF CALCULATION METHOD of 'FIX'. This guards against accidental entry of a payoff calculation method which may result in incorrect quotes on an early payoff.
• G12
• This method may be used for payoffs/terminations. The income from the first twelve (12) monthly payments is guaranteed to the lessor. If the lessee wishes to pay off/terminate within the first 12 months of the lease, the income for the unpaid months up to the twelfth month is added to the current net investment to give the base payoff/termination amount. This method is valid for monthly payment schedule leases only.
• IB
• This method may be used for payoffs/terminations. This payoff/termination method is used only for interest bearing loans. For payoffs, the BASE PAYOFF is the principal outstanding on the payoff EFFECTIVE DATE. For terminations, the BASE TERMINATION is zero. PMTS OUTSTD (calculated for leases only) is the amount of interest due through the payoff/termination EFFECTIVE DATE.
• INV
• This method may be used for payoffs/terminations (see below for information concerning leases in suspended earnings status).
• For payoffs, the current net investment of the lease is the base payoff. It is the minimum dollar amount needed in order to remove the lease from the books without a loss. This method should be used for precomputed interest leases only. Its counterpart, PRN, should be used for simple interest leases. The net investment is calculated as follows:

  CONTRACT RECEIVABLE
  + RESIDUAL
  - (LESSOR, VENDOR, INVESTOR, AND RESIDUAL UNEARNED INCOME)
  + UNAMORTIZED BOOK IDC

• For terminations, this method combines the proceeds and the inventoried value and compares that with the current net investment plus any outstanding receivables in order to compute the gain or loss on the transaction. This differs from the other termination methods, which compare only the proceeds with the total termination due to compute the gain or loss in the transaction. Unlike the INV payoff method, the INV termination method may be used for precomputed, simple interest, and operating leases.
• The current Net Investment of the lease is the base termination amount. Current Net Investment is calculated as follows:
  
  • For precomputed leases:

    CONTRACT RECEIVABLE
    + RESIDUAL
    - (LESSOR, VENDOR, INVESTOR, AND RESIDUALUNEARNED INCOME)
    + UNAMORTIZED BOOK IDC

  • For simple interest leases:

    PRINCIPAL OUTSTANDING

  • For operating leases:

    ORIGINAL ASSET STARTING COST
    - ACCUMULATED BOOK DEPRECIATION

• INV: Suspended Earnings
• If the lease is in suspended earnings status, this method behaves in two significantly different ways depending on the setting of a portfolio level switch, TAKE INCOME ON 'INV' PAYOFF OF SUSPENDED LEASE (Y/N). When the switch is set to Y, INV payoffs and terminations are calculated as described above. When the TAKE INCOME ON 'INV' PAYOFF OF SUSPENDED LEASE (Y/N) switch is set to N and the lease is in suspended earnings status this method behaves as follows:
  • For payoffs, the current net investment of the lease is the base payoff. The suspended income and suspended IDC expense that would have been recognized are instead, re-capitalized back into principal (i.e., suspended income is re-capitalized back into the unearneds, suspended IDC returns into Unamortized IDC book etc.)
  • INV should be used for precomputed interest leases only. The PRN method for simple interest leases does not change its behavior based on the switch.
  • The net investment (base payoff) for a precomputed lease is calculated as follows:

    CONTRACT RECEIVABLE
    + RESIDUAL
    - (LESSOR, VENDOR, INVESTOR, AND RESIDUAL UNEARNED INCOME)
    - SUSP INCOME ACCRUED
    + SUSPENDED IDC
    + SECURITY DEPOSIT
    + UNAMORTIZED BOOK IDC

  • For terminations, this method combines the proceeds and the inventoried value and compares that with the current net investment plus any outstanding receivables in order to compute the gain or loss on the transaction. This differs from the other termination methods, which compare only the proceeds with the total termination due to compute the gain or loss in the transaction.
  • Extended leases with extension method RES should use the INV payoff method.
• NONE
• This method may be used with terminations only. No special base termination should be calculated. Note that other termination charges are still calculated.
• The NONE method must be used for floating, simple interest leases on which value added tax was paid upfront.
• NPV
• This method may be used with payoffs only. The net present value of the remaining payment stream is the base payoff. A switch on the Payoff Customizations screen of the Portfolio update [U0212PA] governs whether any unamortized IDC or IDR will be added to or subtracted from NPV base payoffs. The payment stream is discounted using the discount rate entered on the Book Lease option of the New Lease update [U0101] or the Master Financial update [U0202].
• OPR
• This method is used only for operating lease payoffs, including variable rate operating leases. With this method, the BASE PAYOFF is calculated as the original cost less accumulated depreciation, plus unamortized IDC, less unamortized IDR.
• For lease level payoffs with an OPR payoff method, LeasePak will allow the user to choose how the income is distributed during a Payoff.
• The Take Unbilled Operating Income on 'OPR' Payoff (Y/N), switch in the Payoff Customizations option of the Portfolio [U0212] update, will include Unbilled Operating Lease Receivable, Deferred Operating Lease Revenue, Unrecognized Operating Lease Income and Suspended Income Accrued in the base payoff amount,when set to 'Y'.
• Note: The default value of the field is 'N' and closes the above accounts with a zero balance; automatically rolling back the income at Payoff. This is normal LeasePak behavior prior to the implementation of the field in v5.0a.
• • Unbilled Operating Lease Receivable will be included in the Base Payoff and booked to the Gain account. The balance remaining in this account, which represents the amount accrued but not billed, will be billed at payoff.
  • Deferred Operating Lease Revenue (Deferred Operating Lease Income) will be booked to the Gain account instead of Operating Lease Income.
  • Unrecognized Operating Lease Income (Unbilled Operating Lease Income) will be included in the Base Payoff and booked to the Gain account. The balance remaining in the account will be included in the Base Payoff and the difference in Cash received will reflect the average income, instead of adjusted to the actual payment.
  • Suspended Income Accrued will be included in Base Payoff amount.
• OPR Method: General Ledger Entries

• General Ledger Account	Debit	Credit
  Unbilled Operating Lease Receivable (offset)	Cash	Unbilled Operating Lease Receivable
  Operating Lease Income Adjustment	Operating Lease Income	Gain
  Deferred Operating Lease Revenue (offset)	Cash	Lease Payment Receivable
  Deferred Operating Lease Revenue (offset)	Deferred Operating Lease Revenue	Gain
  Unrecognized Operating Lease Income (offset)	Cash	Unrecognized Operating Lease Income
  Operating Lease Income Adjustment	Operating Lease Income	Gain

• PR
• This method is used for payoffs only. The base payoff is calculated such that a calculated net profit is realized within the first twelve (12) months of the lease. The net profit is the difference between the future value of the payment stream (without the residual) and the residual value of the lease. An additional payoff fee of the sum of three monthly payments is calculated for this payoff method if the payoff occurs within the first 12 months of the lease. This fee is reflected in the FEE/PENALTY amount. This method assumes the cost of funds has been entered and the lease is on a monthly payment schedule.
• PRN
• This method is used for payoffs only. The base payoff is the current accrued principal of the lease plus, for leases with an "LT" type accrual method, the principal receivable. It is the minimum dollar amount needed in order to remove the lease from the books without a loss.
• This method must be used for simple interest leases. Its counterpart, INV, should be used for precomputed interest leases.
• PV2
• This method may be used with payoffs/terminations. The net present value of the remaining payment stream, plus twenty percent (20%) of the original contract receivable is the base payoff/termination amount. The payment stream is discounted using the discount rate. The discount rate is entered through the Book Lease option of the New Lease update [U0101] or the Master Financial update [U0202].
• PVS
• This method may be used with payoffs only. The net present value of the remaining payment stream is the base payoff. The payment stream is discounted using the discount rate. The discount rate is entered during the Book Lease option of the New Lease update [U0101] or the Master Financial update [U0202].
• There is a slight difference between the numbers calculated by the NPV method and PVS method only during the period between the booking date to the first non-advance payment due date if the lease is not yet accrued to the first non-advance payment due date. In that, the PVS method does not include the period when the payments are received in advance.
• Note that if the lease has been accrued to the first non-advanced payment due date, both the NPV method and PVS method give the same base payoff amount.
• PVT
• This method may be used with payoffs only. The net present value of the remaining payment stream plus the amount of unrecouped titling tax is the base payoff. The payment stream is discounted using the discount rate. The discount rate is entered through the Book Lease option of the New Lease [U0101] update or the Master Financial update [U0202]. Unrecouped titling tax is calculated by taking the difference between the titling tax paid out at the start of the lease and the titling tax accrued life-to-date, if the amount accrued is less than the amount paid out up-front. An additional payoff fee of charging a percentage of the original acquisition cost according to the following schedule is reflected in FEE/PENALTY:

• Lease Term	Actual Payoff	Percentage
  < 24 months	any	4%
  24 to 35 months	< 12 months	8%
  	12 to 23 months	4%
  >= 36 months	< 12 months	12%
  	12 to 23 months	8%
  	24 to 35 months	4%

• R78
• This payoff method is to be used payoffs of pre-computed lease only. This method will apply for quoting and processing hire purchase contracts. It will apply to certain Australian states. This payoff method will be calculated in the following way:
• TERMS CHARGES:

  Interest Charges + Brokerage + Govt. Charges + Document Fees + Encumberance Fee

• Note: The Documentation Fee will be used to capture the Doc Fees, Encumberances and Gov't Charges.
• STATUTORY REBATE (Unearned Finance Charge):

  (Months to Run * (Months to Run +1) * Term Charges
  Original Term * (Original Term + 1))

  Months to Run = Months form Commencement of lease to next payment date

• NET PAYOUT (Base Payoff):

  Receivable (Future Net Receivable)
  + Residual
  - Rule of 12 78th Unearned Finance Charge (Statutory Rebate)

• Note: The Net Payout will not include the Balloon Payment as part of the payment stream and is included in the Contract Receivable. Additionally, the Residual in not included in the Base Payoff calculation due to the fact that the residual is not known in a hire purchase since it is part of the payment stream and is included in the Contract Receivable.
• GROSS PAYOUT (Base Payoff):

  Net Payout
  + Payments Behind
  - Payments Ahead
  + Overdue Interest

• TOTAL PAYOUT:

  Gross Payout
  + Clearance Fee

• PAYMENT AS PER LMS (Total Payoff):

  Total Payout
  - Clearance Fee
  + FID

• Note: This payoff method may not be used if a mid-term adjustments (asset add-on, asset payoff, payment reschedule, lease extension, write-down, write-up) has been made to the lease. Since the statutory rebate calculation is based on the Lessor Original Unearned Income and this value is not adjusted when a mid-term adjustment is applied, it will not be able to calculate the correct amount for the payoff.


• RES
• This is a special payoff method, to be used if leases are booked without specifying the residual value in the lease (i.e., the portion of income related to the residual value is not to be earned during the life of the lease). To use this method, the original residual value should be set up in the MARK UP field (entered when the lease is booked). The base payoff is calculated as the net investment of the lease. This method also calculates 2% of the base payoff as a FEE/ PENALTY, representing the estimated property tax. And, the sales tax is calculated on the base payoff plus the original residual value.
• RV
• This method may be used with payoffs/terminations. In the RV (realized value) method the base payoff/termination is calculated in the following way:
  
  • An early payoff/termination charge equal to either three (3) times the normal lease payment if paying off/terminating more than six (6) months before the scheduled maturity date, or equal to the normal lease payment if paying off/terminating six (6) months or less prior to the scheduled maturity date, plus
  • The adjusted lease balance less the realized value (only if the realized value is less than the adjusted lease balance).
• The adjusted lease balance is calculated as the estimated residual value plus the average monthly depreciation amount times the number of months remaining in the scheduled lease term.
• The realized value is the fair market value, or the estimated resale value of the asset as of the date of the payoff/termination, as determined by professional appraisal, published journals, trade standard, or actual sale price.
• This method assumes a monthly payment schedule. It is not valid for leases extended on a month-to-month basis (i.e., without a fixed remaining term).
• SB
• This method may be used with payoffs only. The Sum of the Balances payoff method is similar in concept to the Rule of 12/78ths payoff. (The Rule of 12/78ths payoff method is actually the INV method if the lease is accrued using the Rule of 12/78ths accrual method.) However, unlike the Rule of 12/78ths method, the Sum of the Balances payoff method compensates for any fluctuations, such as Payment Extensions, from the original payment schedule.
• The key difference between the Rule of 12/78ths payoff and the Sum of the Balances payoff is the method by which the fraction of the original unearned income to be refunded to the lessee is calculated:
  
  • The Rule of 12/78ths payoff is based solely upon the term (number of months) of the lease. An implicit assumption is that equal payments are due each month. If this is not the case, for example, a lease has variable payment schedules or a payment extension was performed for the lease, the Rule of 12/78ths payoff yields too much income to be refunded to the lessee.
  • The Sum of the Balances payoff is based upon the outstanding contract receivable for the lease. If no payment is due in a particular period, the outstanding contract receivable is unchanged for that period. If a payment is due, the outstanding contract receivable is reduced by the amount of the payment. This provides the required adjustment for skip payments and schedules with variable payment amounts.
• The Sum of the Balances payoff method calculates the base payoff as follows:

  SUM OF THE REMAINING BALANCES
  / SUM OF ALL BALANCES
  * ORIGINAL UNEARNED INCOME

• This payoff method is only valid for leases with precomputed accrual methods. It should not be used for RES extended leases.
• TAX
  
• This method may be used with payoffs/terminations. The current net investment of the lease plus any unrecouped titling tax is the base payoff/termination. This method should be used for precomputed interest leases only. The net investment is calculated as follows:

  CONTRACT RECEIVABLE
  + RESIDUAL
  - LESSOR, VENDOR, INVESTOR AND RESIDUAL UNEARNED
  + UNAMORTIZED BOOK IDC

• Unrecouped titling tax is calculated as follows:

  TITLING TAX PAID OUT AT THE START OF THE LEASE
  - TITLING TAX ACCRUED LIFE-TO-DATE
  (if the amount accrued is less than the amount paid out up-front.)

• WO
• This method may be used with payoffs/terminations. The WO payoff method can only be applied to precomputed interest type leases. Also, the write off may not be performed until outstanding use tax and outstanding late charges are waived through the Assessment Waiver option of the Assessment update [U0105]. Under the WO payoff method the base payoff is calculated as follows:

  CONTRACT RECEIVABLE
  - UNEARNED INCOME
  + RESIDUAL
  - INTEREST ADJUSTMENT

• The interest adjustment shown above is calculated using the following steps:
  
  • Reverse accruals back to the actual last payment made date.
  • Calculate the factor of original interest (without residual) to original unearned (with residual).
  • Multiply the current unearned income (after the accrual reversal) by the above factor.
  • Reduce the original interest (without residual) by this amount.
  • Then calculate the interest adjustment as follows:

    ORIGINAL UNEARNED (WITH RESIDUAL)
    - CURRENT UNEARNED PRIOR TO ACCRUAL REVERSAL
    - AMOUNT CALCULATED IN STEP 4

• Finally, the total write off amount is calculated as follows:

  BASE PAYOFF
  + OUTSTANDING ACCOUNTS RECEIVABLE
  + OUTSTANDING ASSESSMENTS
  - OUTSTANDING USE TAX
  - OUTSTANDING LATE CHARGES
  - SECURITY DEPOSIT

• The difference between the write off amount and the lease's net book value is recorded as an adjustment to the Lessor Income General Ledger account, rather than as a loss.
• For the termination option, the value at which the asset(s) are returned to inventory is the lower of the fair market value or the total write off amount.

 

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:

• Broker fee, if applicable,
• Allowance for bad debt, if applicable
• Documentation fees OR a calculated percentage or fixed amount

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:

• Calculate or do not calculate initial direct costs.
• Calculate initial direct costs based upon:
  • A fixed amount as specified through the Portfolio update [U0212] New Lease,
  • A percentage as specified through the Portfolio update [U0212],
  • A fixed amount if the lease classification indicates a vehicle; a percentage otherwise.

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

• Unearned income (except for operating leases)
• Total original acquisition cost
• Contract receivable (including advance payments)

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

• INITIAL DIRECT COST METHOD
• This method indicates whether to calculate initial direct costs. If calculated, it also indicates whether to use a fixed amount, percentage, or a fixed amount or percentage based upon the lease classification.
• INITIAL DIRECT COST AMOUNT
• If calculating IDC based upon a percentage, this method indicates whether the calculation should be based upon unearned income, acquisition cost, or contract receivable. For an operating lease type, no calculation is performed if the amount is based upon unearned income or contract receivable, and the lease is set up with a month-to-month payment schedule.
• INITIAL DIRECT COST% (EQUIPMENT)
• If calculating IDC based upon a percentage, this is the percentage used.
• INITIAL DIRECT COST AMOUNT (AUTO)
• If calculating IDC based upon a fixed amount, this is the amount used.
• BAD DEBT INCLUDED IN INITIAL DIRECT COST
• This parameter indicates whether to include bad debt expense as a component of IDC. If Y, bad debt expense is included in IDC when the IDC accounting method is INCM. If N, only broker fees and documentation fees/calculated amount are included in IDC.
• CALCULATE IDC W/O BROKER FEES OR BAD DEBT
• This parameter indicates whether to exclude broker fees and bad debt expense as components of IDC. If Y, only documentation fees/calculated amount is included in IDC. Broker fees and bad debt expense are not included. If Y, the value of the parameter BAD DEBT INCLUDED IN INITIAL DIRECT COST should be set to N.

 

Initial Direct Revenues

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

• INSURANCE FEE
• IDR1 is named Insurance Fee. The name may be customized on the Custom General table [U0712], Field Customization. If insurance premium to be paid to a broker was entered for an asset, the Insurance Fee field will display a percentage of the premium as Insurance Fee receivable. The percentage is established on the Portfolio update [U0212], New Lease customization. Insurance fees create a receivable in LeasePak's G/L, but that receivable does not appear on lessee invoices. An example of insurance fee is a processing fee received by the lessor from an insurance company. When the fee is received, it can be recorded with a manual General Ledger Adjustment [U0121].
• REGISTRATION FEE
• IDR2 is named Registration Fee. The name may be customized on the Custom General table [U0712], Field Customization. This field creates a receivable for a new lease which is billed on the first invoice. A corresponding Assessment Type for IDR2 may be established. Payment can be applied to the assessment via normal Payment Processing [U0102].
• VENDOR SUBSIDY
• IDR3 is named Vendor Subsidy. The name may be customized on the Custom General table [U0712], Field Customization. An amount is entered on New Lease [U0101] or Application [U0801] screen 3. Vendor Subsidy creates a receivable in LeasePak's G/L, but that receivable does not appear on lessee invoices. An example of the field's use is a sales assistance fee received from the equipment vendor. When the fee is received, it can be recorded with a manual General Ledger Adjustment [U0121].
• OPENING COMMISSION
• IDR4 is named Opening Commission. The name may be customized on the Custom General table [U0712], Field Customization. This field creates a receivable for a new lease which is billed on the first invoice. A corresponding Assessment Type for IDR4 may be established. Payment can be applied to the assessment via normal Payment Processing [U0102].

 

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:

• Determine the expected future cash flow.
• Compute the present value of the future cash flow, using a specified discount rate (e.g., cost of capital).
• Determine the initial cash outflow (i.e., the initial investment).
• Net present value is:

  PRESENT VALUE OF THE FUTURE CASH FLOW (step 2)
  - INITIAL CASH OUTFLOW (step 3)

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:

• INITIAL OUTFLOW
  The initial cash outflow is calculated as follows:

  ORIGINAL ACQUISITION COST
  + OTHER CHARGES
  + BROKER FEES
  - DOWN PAYMENT
  - SECURITY DEPOSIT
  - INTERIM RENT
  - ADVANCE PAYMENT(S)

  Interim rent is included only if it is also included in the yield calculation, as specified through the INTERIM RENT (Y/N) field in the Portfolio update [U0212NL].

• FUTURE CASHFLOWS
  Each payment amount is reduced by an amount equal to the bad debt percentage times the payment amount.

• FINAL INFLOW
  The residual amount is included in the final cash flow.

 

Internal Rate Of Return

• Yield
• IRR with Residual
• IRR without Residual

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:

• INITIAL CASH OUTFLOW

  ORIGINAL ACQUISITION COST
  + OTHER CHARGES
  + INITIAL DIRECT COSTS
  (if the IDC EXCLUDED FROM YIELD (Y/N) field is N and the IDC ACCOUNTING METHOD field is not AMOR as set in the Portfolio update [U0212NL])

- DOWN PAYMENT
- SECURITY DEPOSIT
- INTERIM RENT(if specified to be included with the INTERIM RENT (Y/N) field in the Portfolio update [U0212NL])
- ADVANCE PAYMENT(S)

• FUTURE CASH FLOWS
  Each future payment amount in the payment schedule is used as a cash inflow.

• FINAL CASH INFLOW

  RESIDUAL AMOUNT - SECURITY DEPOSIT

  If vendor or investor income participation exists, vendor and investor yields are also calculated. These are calculated by adjusting the payment schedule cash flows by the income participation factors. In these cases, the lessor yield is reduced by the participation yields.

 

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:

• INITIAL CASH OUTFLOW

  ORIGINAL ACQUISITION COST
  + OTHER CHARGES
  + BROKER FEE
  - DOWN PAYMENT
  - SECURITY DEPOSIT
  - INTERIM RENT (if specified to be included with the INTERIM RENT (Y/N) field in the Portfolio update [U0212NL])
  - ADVANCE PAYMENT(S)

• FUTURE CASH FLOWS
  Each future payment amount in the payment schedule is used as a cash inflow.

• FINAL CASH INFLOW
  The residual amount, if any, is used as the final cash inflow.

 

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

• Bad Debt
• Net Investment
• Unearned Income
• Capitalized Cost
• Monthly Rental Income
• Monthly Rental Depreciation
• Contract Rate
• Starting Accrued Principal

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].

 

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