It’s hard to argue with the SEC’s position that off-balance- sheet treatment of leases allow companies to easily make a finance purchase appear like a rental contract. Using current accounting standards, lessees are able to legally keep over 85 percent of an estimated $3.3 trillion of leasing commitments off their balance sheets, according to LeaseAccelerator. While most public companies for IFRS and FASB (GAAP) deadlines are in 2019 or 2020 depending upon the fiscal year calendar for a particular company, the SEC requires comparative parallel income statements for transactions, which for many will have to begin reporting in 2017 (depending on year-end).
So, how much of the leasing industry would be affected by these accounting rule changes? Since the SEC estimates that 63% of public companies use operating leases, and the estimated total cash flows related to non-cancelable operating leases outweighs the cash flows related to capital leases by more than 25 to 1, a significant percentage of the equipment leasing industry will be affected by the changes.
What will lessors and leasing sales professionals do if off-balance- sheet financing disappears and leasing products must be justified solely on economic terms? Without the advantages of off-balance-sheet leases, lessors will somehow have to position themselves as viable alternatives to basic interest-rate- spread lenders.
For those involved in structured transactions, if you don’t have a game plan in place for the new accounting environment, you may be left behind. The value propositions of lessors will need to emphasize creative financing products that address their customers’ pressing business problems, expertise in asset and risk management, and other operational benefits of leasing.
Whether or not the client requests a Capital Lease to take advantage of depreciation programs or not, the sizzle of leasing in the sales presentation will change. Perhaps there will be more Equipment Finance Agreement contracts introduced. Perhaps Alternate Financing will be replacing many leasing companies.
The end of true leases for the small and middle marketplace will surely present true challenges for the industry. Leasing industry boosters will no doubt argue that just as the industry survived and prospered after the repeal of the Investment Tax Credit, ways will be found to survive future changes in accounting rules. Having met a great many smart, creative leasing industry veterans, I would bet on this argument.
Steve Chriest is the CEO of Open Advance and author of “Selling to the E-Suite, The Proven System for Reaching and Selling Senior Executives and Business Acumen 101.” He produces video and radio blogs, as well as continuing as a columnist for Leasing News since 2005.