Finance Lease Case Study

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a) Explain what is meant by an operating lease and a finance lease and outline the main differences between the two. (A) Under the International Accounting Standard (IAS) 17, leases are classified as either a finance lease or an operating lease, depending on who bears the risks/rewards of usage i.e the lessor or the lessee. In the case of a finance lease the risk and reward of usage are borne by the lessee. For example often at the conclusion of a finance lease, which will often be for the major part of the economically valuable life of the asset (10-12 years), the ownership of the asset will transfer to the lessee. Yet whereas risk is concerned if the lessee was entitled to cancel the lease, then the lessors associated losses would be borne…show more content…
Such guarantees only take place in a full recourse transactions. The obligations of the owner are not limited, meaning the arranger have full recourse to the security. So if repossession of the aircraft is not enough to cover ClearSkies liability, the arranger will be able to pursue ClearSkies of the remaining amount. Full recourse transactions will often incur a lower rate of interest from lenders as a result of the greater confidence the lender will hold in the borrower’s requirement to…show more content…
They can go bankrupt but there are no third party creditors meaning the bankruptcy is controlled. Bankruptcy remoteness for ClearSkies SPV is achieved through the structuring which means the SPV acts as an intermediary within the parties to the transaction, used to hold title, borrow money, lease the aircraft out, etc. It is not established for any other purpose and does not carry out any other functions. The SPV performs a dual function in that they can be used to take asset security over the aircraft but also share security over the vehicle. Generally the payments in an out of the SPV will be structured to match each other with regard to timing and value. So the lease payments the SPV receives from the Philippine airline should match that which is required to meet the obligation to the lender. The bankruptcy remoteness refers to the fact that there are no third party creditors to the transaction, who could seek to have the company would down so as to gain hold of its assets. Rather it means that the bankruptcy of the SPV can be handled in a controlled manner by the two parties subject to the transaction. The SPV will generally be established in a low tax

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