Response to Client Request - Essay Example

Since, in this case the client holds the position of the lessor and the customer that has reached the client would fill the place of the lessee in this agreement. Therefore, from the client’s perspective, the leases from the standpoint for lessor hold significant value. Sales-type leases are the leases that give rise to a profit or loss to the lessor with the lease agreement as it would have done had the leased property been sold. This is because the leased property is given to the lessee at the fair value of the property which may be higher or less than the actual cost of the property.

Direct financing leases are a very important type of leases as they are widely used in the lease agreements. There are certain criteria that must be met in order for a lease agreement to quality for direct financing lease. . following criteria; the lease agreement includes three parties that are lessor, a long term creditor and a lessee, the financing provided by the long term creditor is nonrecourse as to the general credit of the lessor, the lessor’s net investment in the lease declines during the early years and rises in the later years.

Any other types of leases, other than those described above, are classified as operating leases. In case of this client, the following points should also be taken into consideration. In case of direct financing lease or sales-type lease, it is also important for the lessor to ensure that the collectability of the minimum lease payments is reasonably predictable. A lessor shall not classify a lease as a direct financing lease or a sales-type lease merely on the basis of an estimate regarding the collectability of the minimum lease payments based on the prior experience with the lessee or prior experience with similar groups of receivables.

The lessor should also make sure that no important uncertainties surround the amount of reimbursements to be made by the lessor to the lessee in relation to the performance of the leased property. The uncertainties might arise due to extensive guarantee provided by the lessor regarding the performance of the leased property. In this case, lessee might retrieve the amount of loss, if any, incurred by the lessee due to the lack of performance of the leased property as opposed to what was promised by the lessor.

These factors shall apply in the case of the client as the client must ensure that the customer that has reached the client would be able to pay the minimum lease payments without any default in the payments. This can be ensured by conducting a market survey regarding the integrity of the customer. If the