CLFP Equipment Finance Fundamentals 1 — Questions and Answers
Question 1: What is the primary distinction between an operating lease and a finance lease under US GAAP (ASC 842)?
- A finance lease transfers substantially all risks and rewards of ownership; an operating lease does not (Correct answer)
- An operating lease is always longer in term
- A finance lease requires no down payment
- An operating lease cannot be renewed
Correct answer: A finance lease transfers substantially all risks and rewards of ownership; an operating lease does not
Under ASC 842, a finance lease transfers substantially all risks and rewards of ownership to the lessee, while an operating lease does not meet these criteria.
Question 2: What is the Equipment Leasing and Finance Association (ELFA) primarily known for?
- Being the trade association representing the equipment finance and leasing industry in the US (Correct answer)
- Regulating equipment lease interest rates
- Issuing CLFP certifications
- Providing equipment appraisals
Correct answer: Being the trade association representing the equipment finance and leasing industry in the US
ELFA is the premier trade association representing companies in the $1 trillion equipment finance sector, advocating for the industry and providing education and research.
Question 3: Which type of equipment lease allows the lessee to acquire the equipment for $1 at the end of the lease term?
- $1 Buyout Lease (Capital Lease) (Correct answer)
- Fair Market Value Lease
- Operating Lease
- TRAC Lease
Correct answer: $1 Buyout Lease (Capital Lease)
A $1 buyout lease (also called a capital lease) is structured so the lessee purchases the equipment for $1 at end of term, making ownership transfer the clear intent.
Question 4: What does 'residual value' mean in equipment leasing?
- The estimated value of leased equipment at the end of the lease term (Correct answer)
- The amount owed after the first payment
- The lessee's credit score impact
- The depreciation taken in year one
Correct answer: The estimated value of leased equipment at the end of the lease term
Residual value is the lessor's estimate of what the equipment will be worth at lease end, which directly impacts lease pricing and the lessor's risk.
Question 5: What is a 'vendor program' in equipment leasing?
- An arrangement where a manufacturer or dealer partners with a finance company to offer financing to their customers (Correct answer)
- A government subsidy for small equipment purchases
- A lessee's bulk purchase discount program
- A lessor's internal credit scoring system
Correct answer: An arrangement where a manufacturer or dealer partners with a finance company to offer financing to their customers
A vendor program is a partnership between an equipment manufacturer/dealer and a leasing/finance company to offer point-of-sale financing options to end-user customers.
Question 6: What is 'implicit rate' in a lease as defined under ASC 842?
- The rate that discounts future lease payments and residual value to equal the fair value of the underlying asset (Correct answer)
- The interest rate charged by the lessor on late payments
- The lessee's incremental borrowing rate
- The annual depreciation rate of the equipment
Correct answer: The rate that discounts future lease payments and residual value to equal the fair value of the underlying asset
The implicit rate is the internal rate of return that the lessor earns, calculated as the rate that makes the present value of all lease payments plus residual equal to the asset's fair value.
CLFP Equipment Finance Fundamentals 1
What is the primary distinction between an operating lease and a finance lease under US GAAP (ASC 842)?