Glossary
Glossary of Terms
Below is a list of commonly used terms in alphabetical order
A
1. Acknowledgement of Variation (AOV)
AOV’s are the legal transfer of liabilities, rights or property from one person (assignor) to another (assignee).
2. Accrual Basis Accounting
The most commonly used accounting method, which reports income when earned and expenses when incurred, as opposed to cash basis accounting, which reports income when received and expenses when paid. Under the accrual method, companies do have some discretion as to when income and expenses are recognized, but there are rules governing the recognition. In addition, companies are required to make prudent estimates against revenues that are recorded but may not be received, called a bad debt expense.
3. Accumulated Depreciation
The depreciation that has taken place on a particular asset, up to the present time.
4. Advance Payments
Payment paid to the financier at the beginning of the contract and then on a per period basis at the start if each rental payment period. For example, a monthly in advance, payment programme required the renter, lessee, hirer to make the payment at the start of each consecutive month.
5. Amortisation (schedule)
The process of separating payments into their principal and interest components. An amortising loan (rental. Finance lease, hire purchase) is one in which the principal amount of the loan is repaid in instalments (monthly, quarterly etc) over the life of the loan, with each payment comprised partially of interest and partially of principal. With an interest only loan, the repayments are entirely interest and the principal does not amortise.
Definition 1:
The gradual elimination of a liability, such as a mortgage, in regular payments over a specified period of time. Such payments must be sufficient to cover both principal and interest.
Definition 2:
Writing off an intangible asset, such as goodwill, over the projected life of the assets.
6. ASIC
Australian Securities and Investments Commissions
7. Arrears Payments
As above with the advance payments however the payment is made at the end of each
payment period.
8. Asset
Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. On a balance sheet, assets are equal to the sum of liabilities, common stock, preferred stock, and retained earnings.
From an accounting perspective, assets are divided into the following categories: current assets (cash and other liquid items), long-term assets (real estate, plant, equipment), prepaid and deferred assets (expenditures for future costs such as insurance, rent, interest), and intangible assets (trademarks, patents, copyrights, goodwill).
9. Authority / Acknowledgement of Delivery (AOD, Acceptance letter)
A letter/document signed by the renter, lessee or hirer signifying the equipment has been delivered.
10. Australian Equipment Lessors Association (AELA)
AELA is the association of the equipment lessors (financiers) in Australia. The Leasing Centre is a member of this association.
11. Assignment
The right of the renter, lessee, hirer to transfer their rights and/or obligations under the contract to a third party. Unless agreed to by the financier in writing under the terms & conditions of the agreement the obligations of the renter, lessee and hirer remain the same.
B
12. Balance Sheet
A quantitative summary of a company's financial condition at a specific point in time, including assets, liabilities and net worth. The first part of a balance sheet shows all the productive assets a company owns, and the second part shows all the financing methods (such as liabilities and shareholders' equity). also called statement of condition.
13. Balloon Payment
The description of a payment made at the end of a Hire Purchase Agreement. Can also refer to a lump sum payment on an interest only loan.
14. Bill of Sale
A type of mortgage over chattels. It is a document, generally given as security for a debt, by which the debtor or grantor transfers ownership to a creditor or grantee.
15. Brokerage
The commission earned on a transaction and is usually calculated as a percentage of the cost price.
16. Base Rate
The basic or minimum wholesale lending rate of a bank or financial institution, on which other lending rates are based, the margin depending on the borrower’s credit rating and competitive factors.
C
17. Cash Flow
A measure of a company's financial health. Equals cash receipts minus cash payments over a given period of time; or equivalently, net profit plus amounts charged off for depreciation, depletion, and amortization.
18. Ceteris Paribus
All other things being equal.
19. Charge
Blanket term covering a security given by a borrower to a lender, enabling the lender to sell the property charged in the advent of the borrower defaulting
20. Current Assets
A balance sheet item which equals the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year. A company's creditors will often be interested in how much that company has in current assets, since these assets can be easily liquidated in case the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for day-to-day operations.
21. Current Liabilities
A balance sheet item which equals the sum of all money owed by a company and due within one year. also called payables or current debt
22. Compound Interest
Interest which is calculated not only on the initial principal but also the accumulated interest of prior periods. Compound interest differs from simple interest in that simple interest is calculated solely as a percentage of the principal sum. The equation for compound interest is: FV = PV(1+ i/n)nt
Where:
FV = future value
PV = present value
i = interest rate (expressed as a fraction: eg. 0.06 for 6%)
n = # of times per year interest in compounded
t = number of years invested
23. CRAA
CRAA or Credit Reference Association of Australia was the company which used to record and hold credit information on everyone. They changed it's name to 'Credit Advantage Limited' and more recently BayCorp Ltd. They are the body which holds credit details such as payment defaults etc on all of us!
24. Charge
Blanket term covering a security given by a borrower to a lender, enabling the lender to sell the property charged in the advent of the borrower defaulting in payment, provided certain legal formalities are observed. The charge may attach to a specific asset (fixed) or to a group of assets (floating) and is normally a registered item.
25. Chattel Mortgage
A Chattel Mortgage is a type of fixed charge taken over identifiable and moveable assets such as motor vehicles, plant & machinery. Chattels are defined as any property other than freehold land.
26. Contra Account
An account which offsets another account. A contra-asset account has a credit balance and offsets the debit balance of the corresponding asset (e.g. accumulated depreciation appears as a negative asset). A contra-liability account has a debit balance and offsets the credit balance of the corresponding liability.
27. Consumer Price Index
CPI. An inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. The CPI is published monthly. also called cost-of-living index.
28. Covenant
A clause in a contract that requires one party to do, or refrain from doing, certain things. Often, a restriction on a borrower imposed by a lender. Also called restrictive covenant or a debt covenant.
These are quite often used by lenders (banks) on larger companies. The debt covenant will restrict the company from taking on a level of liabilities (balance sheet item) above a certain total amount or above a certain ratio against assets (balance sheet item). I have used this to advantage when selling the concept of a Rental to a company with a debt covenant placed upon it.
29. Credit Reference
Banks, suppliers and financiers used in the renter’s, lessee’s, hirer’s business and listed on the application. The financier may contact them to check the renter’s, lessee’s, hirer’s payment habits.
30. Credit Scoring
An objective method of quantifying creditworthiness by assigning numerical values based on meeting certain credit criteria.
31. Cross Collaterisation
When collateral for one loan is also serving as collateral for other loans. For example, in the real estate market, cross-collateralisation can occur when a person already owns a house and wants to buy another one.
32. Current Ratio
An indication of a company’s ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities.
33. Cash Basis Accounting
The bookkeeping practice of recording sales and expenses only when cash is actually received or paid out, as opposed to accrual basis. Generally cash basis bookkeeping is simpler than accrual basis bookkeeping, but makes securing financing more difficult. Also called cash method of accounting. Please note that both of these items are classed as non-cash items and can be treated as an addback in a servicing exercise.Non-cash items (expenses) are accounting book entries, but do not represent actual cash being paid out.
D
34. Default
A condition whereby the renter, lessee, hirer does not make the payments required by the contract.
35. Depreciation
Definition 1
A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life.
Definition 2
A decline in the value of a given currency in comparison with other currencies. For instance, if the U.S. dollar depreciates against the Euro, buyers would have to pay more dollars in order to obtain the original amount of euros before depreciation occurred.
36. Dividend
A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly.
Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders. also called payout.
37. Discount Rate
An interest rate used to bring a series of future cash flows to their present value in order to state them in today’s currency. The use of a discount rate removes the time value of money from future cash flows. See Discounted Cash Flow
38. Discounted Cash Flow
In finance, the discounted cash flow (or DCF) approach describes a method to value a finance contract, project or an entire company using the concepts of the time value of money. The DCF methods determine the present value of future cash flows by discounting them using the appropriate cost of capital or Discount Rate. This is necessary because cash flows in different time periods cannot be directly compared since most people prefer money sooner rather than later (put simply: a dollar in your hand today is worth more than a dollar you may receive at some point in the future). The same logic applies to the difference between certain cash flows and uncertain ones, or "a bird in the hand is worth two in the bush". This is due to opportunity cost and risk over time.
39. Drawdown
To utilise all or part of a large facility
40. Due Diligence
The process of investigation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.
E
41. Effective Rate
Interest and other charges as a percentage of the principal amount over a prescribed period.
42. Electronic Funds transfer (EFT)
An electronically transmitted credit or debit transaction within the Electronic Data Interchange.
43. Equity
Definition 1:
A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow.
Definition 2:
A decline in the value of a given currency in comparison with other currencies. For instance, if the U.S. dollar depreciates against the Euro, buyers would have to pay more dollars in order to obtain the original amount of euros before depreciation occurred.
44. Escrow
The difference between the market value of a property and the liabilities held on the property.
45. Execution
The act of signing a legal document
F
46. Facility
Any type of financial accommodation e.g. lease, hire purchase, rental
47. Finance Lease
A contract which the Lessor purchases the equipment and leases to the Lessee who assumes liability for the maintenance, repairs, insurance and ongoing costs. Regular lease payments are made with a Residual Value payment at the end of the Lease.
48. Free Cash Flow
Operating cash flow (net income plus amortization and depreciation) minus capital expenditures and dividends. Free cash flow is the amount of cash that a company has left over after it has paid all of its expenses, including investments. Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments. While free cash flow doesn't receive as much media coverage as earnings do, it is considered by some experts to be a better indicator of a company's financial health.
49. Freehold
A property where you own both the property and the land on which it was built.
50. Future Value
The value at some point in the future of a present amount of money
G
51. Gross Profit
Calculated as sales minus all costs directly related to those sales. These costs can include manufacturing expenses, raw materials, labour, selling, marketing and other expenses.
52. Gross Profit Margin
What remains from sales after a company pays out the cost of goods sold. To obtain gross profit margin, divide gross profit by sales. Gross profit margin is expressed as a percentage.
For example, if a company receives $25,000 in sales and its cost of goods sold were $20,000, the gross profit margin would be equal to $25,000 minus $20,000, divided by $25,000, or 20%. Basically, 20% gross profit margin means that for every dollar generated in sales, the company has 20 cents left over to cover basic operating costs and profit.
H, I, J, K
53. Inflation
The overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Over person won't be able to purchase as much with that dollar as he/she previously could.
54. Joint & Several Liability
The way in which liability is allocated between several related parties (e.g. between partners in a partnership or between individual trustees in superannuation) such that the parties are liable as a group (joint liability) as well as each of the parties being individually liable (several liability) for the whole claim. If fewer than the full number of parties are sued for a claim, the ones that are can claim a proportion from the rest.
L
55. Leasehold
The right to hold or use property for a fixed period of time at a given price, without transfer of ownership, on the basis of a lease contract.
56. Lessor
The Lessor is also known as the financier and finances the Lease Contract or Rental Contract.
57. Lessee, Renter, Hirer, Mortgagor
These terms refer to the entity that enters into a contract with the Lessor or the Owner
58. Leverage
Definition 1
The degree to which an investor or business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future.
Leverage is not always bad, however; it can increase the shareholders' return on their investment and often there are tax advantages associated with borrowing. Also called financial leverage.
Definition 2
What the debt/equity ratio measures.
59. Liability
In the case of a company, a liability is recorded on the balance sheet and can include accounts payable, taxes, wages, accrued expenses, and deferred revenues. Current liabilities are debts payable within one year, while long term liabilities are debts payable over a longer period.
60. Limited Liability
Type of investment in which a partner or investor cannot lose more than the amount invested. Thus, the investor or partner is not personally responsible for the debts and obligations of the company in the event that these are not fulfilled
61. Liquidity
The ability of an asset to be converted into cash quickly and without any price discount.
62. Joint & Several Liability
An obligation for which multiple individuals are liable for payment
M
63. Mortgagee
The Mortgagee is the financier of the Chattel Mortgage
N
64. Net Profit
Often referred to as the bottom line, net profit is calculated by subtracting a company's total expenses from total revenue, thus showing what the company has earned (or lost) in a given period of time (usually one year). Also called net income or net earnings.
65. Net Profit Margin
Net profit divided by net revenues, often expressed as a percentage. This number is an indication of how effective a company is at cost control. The higher the net profit margin is, the more effective the company is at converting revenue into actual profit. The net profit margin is a good way of comparing companies in the same industry, since such companies are generally subject to similar business conditions. However, the net profit margins are also a good way to compare companies in different industries in order to gauge which industries are relatively more profitable. also called net margin.
66. Non Current Assets
Assets such as plant and machinery, land and buildings, acquired for the purpose of earning income and not for resale in the ordinary course of business
67. Non Current Liabilities
Debt not due to be paid within the next year. opposite of current liabilities
68. Novation Agreement
An agreement whereby the employee, the employer and the finance company then enter into an Finance Lease Agreement under which the obligation to make the lease payments to the Lessor under the Finance Lease is transferred from the employee to the employer
O
69. Opportunity Cost
The cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement
70. Owner’s Equity
Total assets minus total liabilities of an individual or company. For a company, also called net worth or shareholders' equity or net assets
71. Owner
The Owner finances the Hire Purchase
P
72. Payment
The amount of money that has to be paid to the financier by the renter, lessee, hirer or mortgagee on a regular basis e.g. monthly, quarterly etc.
73. Per Diem
Daily. The phrase is Latin for 'per day', and is often used when referring to daily employee expenses or reimbursements.
74. Principal
The capital sum invested on which interest is calculated
75. Principal & Agency Agreement
A legal contract creating a fiduciary relationship whereby the first party ("the principal") agrees that the actions of a second party ("the agent") binds the principal to later agreements made by the agent as if the principal had himself personally made the later agreements.
76. POA
Purchase Option Agreement
77. Profit & Loss Statement
An official quarterly or annual financial document published by a public company, showing earnings, expenses, and net profit. Net income is determined from this financial report by subtracting total expenses from total revenue. The profit and loss statement and the balance sheet are the two major financial reports that every public company publishes. The difference between this statement and the balance sheet deals with the periods of time that each one represents. The profit and loss statement shows transactions over a given period of time (usually quarterly or annually), whereas the balance sheet gives a snapshot holdings on a specific date. Also called income statement or earnings report.
Q, R, S T
78. Rate of Return
The interest rate earned by the financier earned by the financier in a contract measured by the difference between net rentals and the value of investment in the contract calculated on an annual basis
79. Real Time Gross Settlement (RTGS)
A payment system in which processing and settlement take place in real time.
80. Rental (Operating Lease)
A contract which the Lessor purchases the equipment and renters it to the Renter for a fixed term. There is no Residual Value
81. Residual Value
The residual value in a Finance Lease is determined as a percentage of the purchase value of the equipment at the end of the contract. The size of the Residual value is usually based on the Australian Taxation Office's depreciation guidelines
82. Required Rate of Return
The required rate of return in a discounted cash flow analysis, above which an investment makes sense and below which it does not. Often, this is based on the firm's cost of capital or weighted average cost of capital, plus or minus a risk premium to reflect the project's specific risk characteristics. also called hurdle rate.
83. Sale & Leaseback, Rentback, Hireback
A transaction that involves the sale of equipment to a financier and a subsequent Lease, Rent, Hire Purchase of the same equipment back to the original owner who continues to use the equipment
84. Swap
An exchange of streams of payments over time according to specified terms. The most common type is an interest rate swap, in which one party agrees to pay a fixed interest rate in return for receiving a adjustable rate from another party.
A lot of our funders use Interest Rate Swaps to buy their money. Official Swap Rates are published daily in the Financial Review toward the back.
85. Term
The period of time of the finance contract
86. Trust
A legal arrangement in which an individual (the trustor) gives fiduciary control of property to a person or institution (the trustee) for the benefit of beneficiaries
U,V,W
87. VIN
Vehicle Identification Number (always 16 characters long)
88. Working Capital
A financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity.