Equipment Leasing has long been a very effective tool used by businessorganizations for obtaining capital and financial flexibility in the acquisition of alltypes of equipment used by business. The complexities of leasing are constantlychanging along with the continuous development of technology and the ever-changing financial seascape; however, the standard rules for financial accountingfor leases have long been fairly constant. The Financial Accounting StandardBoard issued accounting guidelines in the mid 1970's known as FASB or FASStatement 13, which established standards of financial accounting and reportingfor leases, by lessees and lessors. For purposes of the Statement, a lease isdefined expansively as an agreement conveying the right to use property, plant,or equipment (land and/or depreciable assets) usually for a stated period of time.
Thirty-five years after the current accounting rules were established, newaccounting standards and the International Accounting Standards Board(IASB) and the Financial Accounting Standards Board (FASB) have proposedrules. The new rules would affect operating leases for information technologyequipment, telecommunication equipment and all sorts of capital equipmentutilized by business organizations.
Under current FASB rules, when organizations lease technology equipment,office equipment or other items, the lease can be classified in one of two ways--as a "capital" or "finance" lease, akin to a sale and included on the lessee'sbalance sheet, or as an "operating" lease, akin to a rental and kept off thebalance sheet. Regulators and critics have said many companies structurethe terms of their leases so as to win "operating" status and avoid showingthe leases on their books, thus forcing analysts and investors to estimate theleases' impact on the companies' finances. In the past, operating leases could beincluded on a company's balance sheet at its discretion.
The new accounting rule change proposal, if adopted, would eliminate theoperating vs. capital distinction and put most leases on lessees' balance sheetsunder a "right-of-use" approach: A company would add liabilities for its leasepayments, and assets to represent its right to use the items being leased.
Industry experts have described the proposed changes as a major event thatwill have a great impact on both leasing companies and lessees. The value andproposition of "leasing" versus "purchasing" equipment will certainly be affectedand will probably have a greater impact on larger users that have traditionallyrelied on equipment leasing as a financial resource and tool. One industry expertbelieves that the change in accounting policy could shift user's to outsourcedor "cloud" computing that is delivered under a service contract arrangement andnot currently affected by the proposed change.
The Equipment Leasing and Finance Association (ELFA) have published a seriesof articles regarding the proposed accounting changes and the financial presshas written a number of articles regarding the wide sweeping changes to theaccounting standards. The IASB and FASB are accepting public comment onthe proposal until Dec. 15, 2010 and final votes on adopting it wouldn't occur untilafter that. The accounting boards say they expect to hold public roundtables onthe move, among other forms of outreach. The ELFA has stated that it will submita comment letter to the IASB and FASB detailing the association's specificconcerns before the Dec. 15, 2010, comment deadline. The association will askthe national and international accounting standards-setting bodies to addressa number of concerns about the proposal, including issues related to lessoraccounting.
Lease financing is a critical means of capital formation for U.S. businessesthrough the acquisition and investment in capital plant and equipment andreal estate. The ELFA has further stated that it's overriding concern is thatany standard that replaces the SFAS13 should improve the clarity in financialreporting of these transactions without undue burden on businesses from anaccounting or a financial standpoint.
Clients of Fitzgerald & Hewes LLP are urged to review the proposed changesand how they may impact their organization, and to contact the ELFA to assist incommenting on these important issues. If you need our assistance in the reviewthe new rules or commenting, please feel free to contact us, we would welcomethe opportunity to help you and your organization.
