Terms Beginning With 'l'

Lease

  • January 18, 2021
  • Team Kalkine

What is a Lease?

A lease is a well-written contract between two parties, stating all the conditions including payment terms under which a lessor, the owner of the property charges lessee, the occupant of the property for a fixed tenure, abiding the terms of the agreement.

It assures both lessee and lessor for regular payments and continuous use of property, respectively. Both the parties may undergo legal penalties failing to sustain the agreement terms.

Source: Shutterstock

Understating Lease

A lease is an agreement permitting a renter to utilize the lessor's property in return of determined instalments and as per specific standards. All the lease conditions, including roles and responsibilities of both the parties and payment terms, are charted on the lease agreement.

The most common type of lease agreement noticed by most people is an apartment lease where the landlord allows a tenant to occupy his/her property for a fixed period in exchange of money known as rent.

On the commercial scale, we can notice the mining or O&G leases which allows mine owner or the lessor to provide property rights to an exploration company or lessee for further exploration, drilling and production of minerals from the land.

What are the Broad Classes of Lease Agreements?

The leases are typically classified into two broad categories, namely: Open-end and Closed-end lease.

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An Open-end lease agreement obliges a lessee to make one shot payment at the end of the lease agreement accounting the difference between the Fair Market Value (FMV) and the depreciated value of an asset or property.

On the flip side, a Close-end lease is a type of rental agreement where a lessee makes a regular payment and is non-obligatory to purchase the leased asset or property at the end of the contract term.

What are the different types of Lease?

Various types of properties and assets might be leased out like:

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Components of a Lease

The most widely recognized things found in a lease contract are:

  • The description of the lessor and lessee
  • The information about the leased property
  • Payment terms for the lease
  • Duration of Lease or Contract duration
  • Penalties for late payments
  • Lease Buyout terms

Breaking a Lease

Since a lease is a coupling contract between two parties, if a lessee breaks the lease, he/she might have to confront serious lawful consequences and some financial risks. A lessee who violates the agreement without prior compromise with the lessor faces a critical lawsuit, a defamatory blemish on their credit report, or both.

Source: Shutterstock

A lessee may face other challenges in the future, like issues in leasing another property or assets due to the credit report's negative record. A lessee who wants to break their leases should haggle with their landowners or look for lawful advice. Sometimes, finding another lessee for the property or security relinquishment encourages lessors to permit lessees to break their leases with no further obligations.

Some lease agreement also allows a lessee to compromise the lease agreement before the previously agreed timeline or condition, using a Lease Buyout option. In some cases, if the lessor is not fulfilling the contract terms, the lessee has the right to terminate the lease.

An earnings announcement is a public statement of a company’s earnings, usually done on a periodic basis. These official announcements are released quarterly or yearly to inform the investors and the market about a company’s financial performance. Companies announce their financial reports through press releases on their websites and list them on the stock exchanges website. After the information is released through a conference call, there is a question-and-answer round with the senior management in which analysts, media, and investors can participate. On the basis of the report, analysts then incorporate earning measures such as EPS (Earning Per Share). These reports help investors in making sound investment decisions. Earnings results are announced during the earnings season on a date chosen by the company. Stock prices of the companies take a swing before and after the company releases its earnings report. Equity analysts also predict earnings estimates through their analysis which drives stock prices movement due to speculations. Stock prices even move after the earning results are declared, up or down, depending on how the results have turned out. Source: Copyright © 2021 Kalkine Media Pty Ltd. When are earning announcements made? It is mandatory for every listed company to report its quarterly financial results in the US but not in Australia. In Australia, companies release their financial report on a semi-annual basis. Having said that, many Australian companies also update their shareholders quarterly, but these are not considered official earnings. These quarterly reports are released to satisfy the market demand for information and to disclose the company’s guidance on its performance. The financial calendar varies from country to country and therefore, the earnings season changes as well. In the US, the earnings season starts after the final month of the financial quarter. Usually, American companies start posting their earnings reports in January, April, July, and October. In Australia, companies report twice a year, usually around February and August, or May and October. It depends upon the company’s financial cycle. However, whether quarterly in the US or semi-annually in Australia, these earnings results are required as agreed while listing the company with the stock exchanges. Source: Copyright © 2021 Kalkine Media Pty Ltd. Why are earnings announcements necessary? Financial results help investors, media, and other stakeholders of the company to have a greater understanding of the company’s financial footing. Companies not just provide sales, operating profit, net profits, but also offer guidance and outlook for coming months. Additionally, these reports also have senior management statements directed at the market. Therefore, earning announcements act as an informative document for the investors and analysts to study and gauge a company’s performance. Analysts can provide earnings estimates, and investors can then take wise investment decisions. These documents are also vital for companies when it comes to seeking funding for the business. Financial institutions can also judge a company’s financial health by evaluating earnings reports. The management offers insights on growth drivers, risk factors, etc that impacted the earnings during that particular period. Analysts also assess the earnings results, taking into account the external factors that drove the growth or impacted the firm negatively. These factors could be mergers and acquisitions, bankruptcies, economic discrepancies, policy changes, etc. For investors, earnings reports are essential because these announcements swing the price up or down. Traders keep a keen eye on these reports as it can be a time when they can confirm positions. However, some investors also avoid earnings seasons because of the involvement of various human factors.

A phrase in a deed/lease that illustrates the nature of interest rights being given to the grantee or lessee. The clause usually starts with the words such as ?to hold and to have? in a deed or lease.

What is a Balance Sheet? A balance sheet is a financial statement of an enterprise. It is one of the three primary financial statements used in analysing a business or modelling forecast for a business. Other two include the income statement and cash flow statement. It shows the financial positions of business in a given period and includes critical information like the value of assets, liabilities, cash and shareholders’ equity. In this way, a balance sheet enables the information seeker to evaluate the net worth of an enterprise. Good read: Evaluating Financial Statements The balance sheet is a source of information for a number of stakeholders, including investors, creditors, bankers. It helps stakeholders to make efficient decisions and provide transparency. Enterprises are primarily judged on the financial position, which is based on the income statement, balance sheet and cash flow statement. The balance sheet is also referred to as Statement of Financial Position and is applied, along with other financial information, in deriving financial ratios, financial modelling, stress testing, credit appraisal, credit rating etc. It reflects the position of an enterprise during a given period, which could be quarterly, semi-annual, and annual. Corporations are required to publish financial information regarding the business under different laws across jurisdictions. Why does the balance sheet balance? Balance sheet is balanced because of the double entry bookkeeping system, which necessitates the effect of transaction on two accounts. For instance, an entrepreneur starting a business with $5000 cash will increase cash (Assets) and capital (Shareholder’s Equity). The below equation is the result of double entry bookkeeping system. Assets In the assets section, balance sheet represents the value of a business which can be converted to cash and is owned by the enterprise. Assets represent the ownership of an enterprise. Companies derive assets through transactions, investments, acquisitions, internal developments etc. Assets are generally recorded at a cost which was paid at the time of transaction. But conservative accounting principle necessitates companies to record assets at current costs, and the difference between actual cost and current cost is charged to profit and loss account. The balance sheet does not include internally generated assets like Domino’s Pizza Logo, McDonald’s logo that are valuable for business. However, such intangible assets are recorded in the balance sheet when an enterprise purchases intangible assets or acquire by way of business combinations. Companies are required to report assets less than costs at times like anticipated losses from a receivable are charged to the income statement, and receivable are reduced by same amount in the balance sheet. Depreciation and amortisation is the process charging expenses of long-term assets to the income statement and reducing the same amount from the balance sheet value of long term assets. There are two types of assets: current assets and non-current assets Current Assets: Current assets are those assets that could be realised in cash in one year. These assets include cash, cash equivalents, inventory, trade receivables, financial assets, prepaid assets, financial assets etc. Current assets also indicate the expected amount of cash a business can potentially convert over one year period. It also includes assets held for sale purpose. Current Assets are used to calculate working capital and other financial ratios. Non-current Assets: Non-current assets are those assets that would not be converted into cash easily. These are long term assets of the business and expected to generate long term benefits for the business. Non-current assets include property, plant, machinery, lease assets, intangible assets, financial assets, deferred tax assets, investments, advance, long-term receivables etc. Liabilities Liabilities represent the obligations of an enterprise. It can be the source of assets and also represent a claim on assets of an enterprise. A liability is recorded as a result of past event or transaction, and settlement of liability is expected to result in an outflow of funds, resource or economic benefits. There are three types of current liabilities: current liabilities, non-current liabilities and contingent liabilities. Current liabilities: Current liabilities are short term commitments of an enterprise that are needed to be settled within one year. It reflects the amount of funds that would be required by an enterprise to pay-off its short-term obligations. Current liabilities include trade payables, borrowing, current tax payable, lease liabilities, financial liabilities, provisions, accrued expenses. Information seekers use current liabilities to evaluate the liquidity of an enterprise and various other ratios. Non-current liabilities: Non-current liabilities are also known as long term liabilities of an enterprise because these are due after one year. A company with a loan maturing in ten years’ time will be required to report principal amount under non-current liabilities. Non-current liabilities include long-term borrowings/debt, deferred tax liabilities, lease liabilities, financial liabilities, provisions, capital leases, etc. Contingent liabilities: Contingent liabilities are the obligations of a firm that could become due to the outcome of a future event. Moreover, these are potential obligations of a firm. A common example of contingent liabilities could be litigation against the company, which may force it to pay money upon judgement. Shareholder’s Equity It is the amount of capital the owners or shareholders of an enterprise have provided to the business. Shareholder’s equity also includes the amount of cash generated by the business after repaying all necessary obligations in a given period. Shareholder equity includes equity share capital, preferred share capital, paid-up capital, retained earnings, accumulated losses. Negative shareholder equity would mean that the liabilities of the company exceed assets of the company. A positive shareholder’s equity indicates that the company has surplus assets over liabilities.

Capital Adequacy Ratio is a bank’s level of capital for its inherent risks, and capital under the requirement serves a loss-absorbing purpose for banks. It is stated as a percentage of an institution’s risk-weighted assets.     Capital of a bank is segregated into two parts, namely Tier 1 and Tier 2 Capital. Both the tiers are intended to save the bank in the event of a crisis, which may lead to a threat to the bank’s going concern. However, each tier of capital has its purpose when a bank incurs losses or risks to the going concern increases. To calculate CAR for an institution, the sum of Tier 1 and Tier 2 capital of the banks is divided by risk-weighted assets. Tier 1 capital consists of Common Equity Tier 1 (CET1) and Additional Tier 1 Capital (AT1). Under Basel III, the Basel Committee requires banks to have over 4.5% CET1 capital, and after including AT1, the level of Tier 1 Capital should be over 6%. Also, the sum of capital instruments held by banks, including Tier 1 and Tier 2 capital should be minimum 8%. AT1 capital of the institutions could include perpetual contingent convertible instruments, but CET1 capital is pure common equity.   How Capital Adequacy Ratio Arrived In Banking Regulations? Money has sometimes been mankind’s problem. In the Great Depression of the 1930s, there was a dramatic imbalance between fiscal policy and monetary policy, reflecting the inability of policymakers to strike a balance since interest-rates were raised at the outset of an economic crisis. This was also partly responsible for the development of Keynesian Economics, which laid the foundations for monetary policy. Capital Adequacy Ratio is administered by the banking regulator in a country, which could be the Central Bank, like in the US or a separate body like the Australian Prudential Regulation Authority (APRA) in Australia. The growing internationalisation of banks led to the creation of Committee on Banking Regulation and Supervisory Practices in 1974. Also known as Basel Committee, it was headquartered in Basel at the Bank for International Settlements. After the failure of Bankhaus Herstatt in West Germany, the Basel Committee was formed to oversee the international supervisory standards, improve resilience in the financial system worldwide, and to co-operate on banking supervision with member nations. Since 1975, the Basel Committee on Bank Supervision (BCBS) has published landmark supervision protocols for national regulators and global standards, including Basel I, Basel II, Basel III capital adequacy accords. The need for Capital Adequacy Ratio was felt after the Latin American      crisis in the early 1980s. Over the past two decades into the 1980s, the Latin American nations borrowed heavily to fund industrialisation, but a global recession and interest rate hikes in 1970s and 1980s led to the Latin American Debt crisis. It was the time when global policy thinktanks stressed on the need for capital reserves; commercial banks held a large amount of capital invested in Latin American bonds, which were then presented with looming risks of default. The Basel Committee was concerned with the deteriorating capital ratios of international banks, resulting in the need for measurement of capital adequacy and abolishment of erosion of capital standards. Now banks started measuring capital adequacy based on weighted risks, including on and off-balance sheet risks. How Is the Origin And Evolution Of Basel Accord Mapped? In July 1988, the G10 Governors approved Basel I, which required banks to maintain a minimum ratio of capital to risk-weighted assets of 8%. Banks were given until 1992 to implement Basel I Accord, which was also adopted by members outside the Committee. Additional amendments to Basel I continued until the proposal of Basel II, which was a new capital framework. The new accord led to a revised capital framework in 2004. It sought to develop and expand the rules for minimum capital requirements enacted in 1988. Basel II also focused on the supervision of capital adequacy and internal assessment process by institutions, and disclosure requirements to bolster ethical practices and market discipline. As a result of financial innovation, there was a need for a framework to better reflect the underlying risks. It also set the tone for continued improvement in efficiency of risk measurement and control. But the Committee realised the need of further improving capital framework before the collapse of Lehmann Brothers in 2008. The Global Financial Crisis during 2007-09 reinforced the need for an improved capital framework in the wake of the banking crisis. Initially, the Committee released guidelines on liquidity risk management in the month when Lehmann Brothers failed. BCB extended the approach of Basel II and released guidelines on the treatment of trading book exposure, off-balance sheet vehicles, and securitisation. In September 2010, the body introduced higher minimum capital guidelines. During the same year, Basel III was endorsed by the Committee, which has amended the accord several times since 2010, including implementation dates. This accord included a range of areas for efficient risk management and control in the banking system. Improved guidelines on quality, quantity of regulatory capital, especially common equity capital. Capital Conservation Buffer (CCB), an additional layer of common equity, was introduced. Failure to meet CCB requirement restricts pay-out to meet the minimum common equity requirement by the banks. Countercyclical Capital Buffer was announced to limit a bank’s participation in widespread credit booms. Basel III also introduced leverage ratio, minimum liquidity ratio, liquidity coverage ratio, and further requirements for systematically important banks. ASX Banks And Capital Requirements Australian major banks include Commonwealth Bank of Australia (ASX:CBA), National Australia Bank Limited (ASX:NAB), Westpac Banking Corporation (ASX:WBC), and Australia and New Zealand Bank Limited (ASX:ANZ). Over the past years, the banking regulations in Australia galloped forward in contrast to the global developments. Financial System Inquiry 2014, under the leadership of David Murray AO, also recommended increasing the bank’s capital requirements to over 10%. As a result of these recommendations, the banks now have large capital reserves in Australia. Basel III implementation pushed further ahead to 2023 In the wake of COVID-19, the implementation of Basel III standards has been further postponed to one year later to 1 January 2023. It was understood that the deferral of implementation would provide the banking sector the necessary capacity in response to COVID-19 economic deterioration. In addition to meeting the Basel III requirements, global systemically important financial institutions (SIFIs) must have higher loss absorbency capacity to reflect the greater risks that they pose to the financial system. The Committee has developed a methodology that includes both quantitative indicators and qualitative elements to identify global systemically important banks (SIBs). The additional loss absorbency requirements are to be met with a progressive Common Equity Tier 1 (CET1) capital requirement ranging from 1% to 2.5%, depending on a bank’s systemic importance.  

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