Report: Lease Financing on the Rise

Companies are spending more on leases, loans, and credit.

More than half of the $1.1 trillion invested in plant, equipment, and software last year was financed through leasing, loans, and credit, according to a report released Tuesday by the Equipment Leasing and Finance Association.

American industries used such financing as leases, loans, or lines of credit for $598 billion worth of equipment, the report, produced with the Global Insight consulting firm, found. Such equipment ranges from aircraft and rigs to office equipment and mining machinery. Global Insight surveyed 472 businesses regarding the acquisition of equipment in 2006 to reach its estimate.

Such a large amount of capital spent on lease financing partially explains the anticipation of new lease accounting regulations expected to be put in place in 2009. Under the current standards, only capital leases appear on corporate balance sheets. The more widely used operating leases appear only in the footnotes of financial statements. The proposed amendments have spawned anxieties about possible negative effects on earnings as leases become onerous liabilities.

According to the report, leases comprise 17 percent of that $598 billion worth of financing. Ralph Petta, vice president of research and industry services at ELFA, says that the survey does not track what proportion of the lease financing is designated as operating leases or capital leases. But a great majority are likely to be classified as operating leases.

Charles Mulford, an accounting professor at the Georgia Institute of Technology and a lease accounting expert, says that a heavy concentration of lease financing receives operating lease treatment. “I suspect all such leases will be capital leases in the future,” Mulford told CFO.com. However, if a new standard is approved by the Financial Accounting Standards Board, that standard would only apply to new leases, he said.

Financing through leases, loans, and credit continues to rise. In 2005 such financing amounted to $570 billion before growing to $598 billion last year. In 2007 it is projected to reach $625 billion, according to the report.

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