Last month, I wrote about changes coming to the way companies will account for leased equipment. There are several good reasons to lease, and the primary benefits will be unchanged under the new rules. Compared to the accounting treatment of a traditional loan or purchase transaction, leasing equipment is still a prudent equipment acquisition strategy. Here’s why:
- An asset value is booked equal to the present value of rents as “right-of-use (ROU),” and an offsetting liability entered as “obligation to pay.”
- Because the liability is considered non-debt (other debt), it may not jeopardize debt limit covenants.
- Operating leases are residual-based structures. Consequently, the asset and liability recorded will probably be less than the cost of the asset. This yields a lower on-book balance than does financing with a traditional loan.
In addition, leasing continues to provide a host of advantages, including maintaining cash flow, tax benefits, maximizing flexibility, improving asset management and convenience.
Although the new rules don’t go into effect for another two or three years, workboat operators should take a closer look at processes, collect data and start planning now. The Equipment Leasing and Finance Association (ELFA), which represents businesses in the equipment finance industry, has some tips to help the lease accounting changes go smoothly for your business:
- Inventory all equipment lease and rental contracts. Knowing the amounts and nature of contractual obligations and terms of your leases will enable you to understand your company’s accounting and tracking needs.
- Identify IT/software requirements. To determine if the technology in place will meet the new standards, ask your accounting software vendor how they plan to support the changes.
- Review your debt covenants. Although the lease accounting changes will have limited effect on debt covenants, discuss fully any potential implications with your bank or creditors.
- Seek out industry expertise and counsel. In addition to getting accounting expertise, consult your equipment finance provider. They have hands-on experience, informational resources and advice on industry best practices to help you assess the possible impact of the changes on your current and future leasing needs.
- Enact a plan. With the information you’ve gathered, you can start planning the budget and resources necessary for updates and systems changes to support the new rules. You may want to think about creating a transition timeline and forming a transition team consisting of key members of your staff to guide your transition preparations.
Although it can be difficult to embrace change, workboat operators that start looking at internal processes and preparing now to make the required lease accounting changes will be at an advantage when the new guidelines take effect.