The following suggests three likely situations, under which a required equipment should be leased. In the situations, ethical issues come up because a significant section of the motivation appears to have an agreement of a capital lease as well as ensuring that the liability is kept off the balance sheet. Analysis
One of the lease options considered to be the most honest is the capital leasing directly from GWC. The option stipulates that SC would have to provide a NPV report of the total liability lease as a capital asset and a liability only if the lease qualifies to be considered a capital lease. The restrictive debt covenant makes SC opt not to show its balance sheet debt. The motivation behind the suggestion made by GWC of reaching an outside consensus with a client to sign a significant a definite residual value is the need to provide the debt details.
Based on SC hopes that the device will function, the lease agreement should not have the guaranteed residual value written on it. Similarly, the residual value would have to be part of the total lease expenses for discounting. As an alternative, a side letter should be used to the residual value guarantee information. The practice appears to be unethical because of its intention to misrepresent the scenario deliberately. In addition, the choice of decreasing the service fees as part of an action to compensate the guarantor is highly doubtful.
In relation to financial statement effect of a capital lease, amortization is done on the leased capital asset during the minimum lease period. Moreover, a reduction on the liability is done during each period of payment to a point that the lease’s implicit interest is exceeded by each payment lease. Paying of the obligation will be executed rather quickly because the lease is front-loaded.
The second lease option is leasing through a special-purpose body. The situation involves SC leasing the asset from a company related to it by use of an operating lease that is specially developed only for leasing purposes of the asset from GWC. The device is the most common for purposes of keeping leased assets and leased liabilities off the balance sheet. The ethics involved in this practice are questionable even though it is the most common way of including a third party between the lessee and the lessor.
The third lease option is the issuing of convertible desired shares. In this approach, debt is replaced with share equity but the intention will not succeed since the conversion should be a certain number of shares not a cash-equivalent number of shares. In essence, the situation is similar to paying off a loan using the cash proceeds after issuing new shares for cash. The shares converted should be categorized as debt.
There is no alternative that is expected to succeed at ensuring the balance sheet debt is kept off, which the resulting analysis describes as a practice that is ethically doubtful. The goal of SC is to avoid extra expense that are highly expected to come from violation of the debt agreement as well renegotiating the debt consent. To complete its objectives, it is better for SC to give straight convertible shares or agree on an operating lease. However, the cost would be higher because of the lessor’s high risk-bearing.
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