Synthetic Leases - 3532 Words

Abstract By now most of us have heard and read numerous articles about synthetic leases. We also know synthetic lease transactions are relatively commonplace for financing corporate build-to-suits and acquisitions, and that they are widely accepted by corporate real estate executives, financial institutions, and accounting firms. But is the synthetic lease a panacea for the corporate executive faced with a leasing decision? Are they the perfect solution for keeping real estate assets oil the company balance sheet? Are there any drawbacks to a synthetic lease? Before entering into a synthetic lease, the corporate tenant should know the potential shortcomings of a synthetic lease as well as when and when not to use one.†¦show more content†¦Off balance sheet financing, for instance, operating and synthetic leases, not only overstates corporate earnings and perjures their financial positions, it also allows them to preserve the ratios needed to assure debt contracts. This decrease s the authority of such contracts, because the companies are not in reality keeping their debt ratios low; theyre lying about the amount of debt they actually have (Edman, 2011). Ethical professionals, who willfully present transparent financial statements, are the only true way to prevent misconstrued financial statements. Likewise users of financial data will always have their work cut out for them. Investors must be diligent to discover a company’s true financial state. FASB will never rid the world of every accounting inconsistency (Edman, 2011). Synthetic leases can serve two important purposes: First, for financial accounting purposes, they enable lessees/sponsors to treat leases as operating leases, whereby payments are recorded as rent expense and the underlying assets and the associated liabilities are kept off the lessee’s balance sheet. This treatment of the lease enables the company to show a stronger balance sheet than if the lease was treated as a capital lease (Soroosh and Ciesielski, 2009). Second, for federal income tax purposes, these contracts are structured so that the lessee/sponsor may treat theShow MoreRelatedOrganisation Study of Rado Tyres Kothamangalam9692 Words   |  39 Pagesmarketing problems too. The board of directors realized that the company was slowly dying and thought of remedial measures. In 1993 the company entered into an agreement (for one year) with Apollo Tyres LTD. According to which the company was given on lease. Apollo Tyres supplied all the raw materials. Hence RadoTyres was acting only as a production unit, during this period. In 1994 the company entered into a similar agreement with CEAT Tyres, one of the leading tyre manufacturers in India. 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