Mumbo Jumbo

I should get started on my taxes, but it's too much like work so I've been putting it off.

For the past week I've been working on changing the terms ("restructuring", in financial parlance) of a leveraged lease. Leveraged leases---oversimplified, they are long-term leases with secured debt ("nonrecourse"--think of a home mortgage where the owner could walk away from his obligation by turning his house over to the bank)--occupy a special niche in accounting because they are one of the few remaining avenues by which companies can keep debt off the balance sheet. If a car costs $20,000, and the lessor borrows $16,000 from the bank and puts up $4,000 in equity, the lessor does not show a $20,000 asset and a $16,000 liability on his balance sheet, just a $4,000 asset. Qualifying for this accounting treatment has exacting conditions, which I won't detail here.

Most leveraged leases do have "economic substance" because the owner/lessors enjoy real cash flow and pay real taxes over the life of the equipment; however, in the early years, accelerated depreciation and interest expense exceed rental income, so a corporate owner receives tax losses which it can use to offset income from other sources. The accounting is peculiar because leveraged leases require owner-lessors to project all the elements of cash flow, including taxes, over the term of the leveraged lease, and future changes, such as an increase in the corporate tax rate in 2006, will affect the amount of income recorded in 2004. [Don't go away, I'll stop.]

Some of us have volunteered to help seniors at a San Francisco high school apply for college. We have also introduced them to careers in accounting, law, insurance, and related professions by having them sit with us and see what we do all day. It's a wonder that they haven't run kicking and screaming for the exits. I know when I was 18 the previous two paragraphs would have seemed like utter mumbo-jumbo. That's why I make it a point to take a walk every day; I need to keep my perspective. © 2004 Stephen Yuen


From yesterday's bike trip to Redwood Shores; the geese flock near Electronic Arts.