(Don’t) Look Deep into My Lease

Terms can be mesmerizing, but companies get a rude awakening when leasing's real cost is revealed.

Some tough product-return terms that lessors try to install:

  • “All or nothing” clauses may call for full payment if even a few items are not returned.
  • Moving a piece of equipment could force the lessor to buy it.
  • Returns in original boxes or to distant locations may be required.
  • Steep charges may apply for even superfluous missing parts.
  • “Keep well” fees often make the lessor whole if it cannot redeploy the equipment at the same rate.
  • Unreasonable wear-and-tear standards may result in penalties.
  • Up-front deposits may be applied for such unexpected charges as restocking, preventing the money from being returned.

On Borrowed Time

The Changes Ahead for Lease Accounting

When the Financial Accounting Standards Board conducts its promised review of the off-balance-sheet treatment now allowed for equipment leases, a company’s lease-versus-buy equation will certainly change. The degree of the change, though, will be open to debate.

Finance executives like Andrew Almquist of Papa Gino’s say that the FASB revisions will “make leasing substantially less attractive.” But Michael Fleming, president of the Equipment Leasing Association (ELA), believes that if reforms are managed properly, the effect on leasing will be minimal. ELA studies show that the leases most companies employ aren’t designed primarily for balance-sheet reasons. Some companies do, of course, work to reduce their balance-sheet liabilities and assets as part of a broader financial strategy. “But while every company goes through determining that kind of mix,” says Fleming, “it’s a secondary consideration to such things as the convenience of leasing.”

Association studies show that only about 1 percent of current leases are synthetic leases, those structured as financings for tax purposes but designed as leases purely for accounting purposes — and the type that most concerns reformers.

The ELA wants to make sure that any reforms to lease accounting acknowledge economic realities. If regulators devise a new, principles-based system, “there are a lot of issues to be measured and dealt with that are just as complicated as leasing is now,” says Fleming. FASB, for example, will have to evaluate such elements as options to buy leased equipment. “How are you going to add that to the asset value?”

Another task for the association will be to propose a materiality standard that allows companies to continue relying on footnotes for small leasing deals.

“We think FASB ought to address carving out equipment acquisitions at certain levels. Probably below $200,000 would be a good number to exempt,” says Fleming. — Roy Harris

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