Question

Consider the sales manager's position and the CFOs position. Present both sides and come to a consensus as to the best position. Defend your decision. Additionally, the CFO at this company has asked for your guidance in evaluating leases. Write a 350 word memo on this topic, specifically on how to determine whether substantially all of the risks and rewards of ownership are transferred in the lease. Address how "substantially all" is defined in the authoritative literature. Submit your assignment.

Answer 1

As the sales manager's role is concerned in an organisation to increase all sorts of revenues from operations while a CFO looks into the funds and book keeping but both of the areas are being driven by some common factors such as cost,growth,independence,quality management to the organisation which is ultimately going to impact the image of the organisation for different stakeholders.

There may be areas where consensus of both the managers, that is managers of Revenue and managers of Finance,had to be the primary necessity for an event to occur while keeping the interest of both safe. For Eg: An organisation wanting to have some large capital outlays may want to cut the initial outflow of funds as it has to incur huge cost of funds thereby not advised by CFO but the same may be a core necessity for the revenue department, so they have to arrive at a consensus to achieve the organisational goals in long term.

Illustrating the above example the Sales manager,say a production company where funds are necessary for increasing the volume, would solely want any how to achieve the targets without giving attention to the other aspects of doing the task like what should be the cost of funds, whether they are easily available, whether it would be feasible for company to rely on given source of funds, etc.

While on the other hand the CFO would be solely focused on the above aspects without giving attention to the trends of the industry, position of the company in the industry, current need of the customers etc.

Thus a consensus between the Sales manager & the CFO is the prima facie requirement in all such situations.

For understanding leases and evaluating them first we have to understand a "lease" which is basically and generally:

-an agreement

-where by the lessor conveys

-to the lessee in return for a payment or series of payments

-the right to use an asset

-for an agreed period of time.

So it is advisable for the CFO so to see and evaluate all of the above factors one by one in the light of the need of the organisation as a whole whether the given lease proposed to be undertaken is overall beneficial and if not, if there are other compensating factors in the long term even if they are non financial.

How to determine 'substantially all" the risk and reward are transferred:

1.The lease transfers ownership of the asset to the lessee at the end of the lease period

2.The lease term is for the major part of the economic life of the asset.

3.The PV of all the payments of the lease is substantially the Fair Value of asset

4.Only the lessee can use the asset.