Defining Total Cost

Stakeholder: Warehouse

Are you in the dark with the total cost of your lease?

In any lease, a monthly payment rarely defines total cost.  It is common for leasing companies to include onerous terms and conditions that blur transparency, inhibit flexibility, and result in unanticipated charges for the customer.  These predatory practices make it difficult to calculate the total cost of a lease.

For example, many leasing companies charge hourly overage charges for exceeding an annual usage limit.  These charges can be expensive ranging from $1.00 to $7.00 per hour, thereby creating an unbudgeted surprise for the internal customer.  In addition, prior to equipment turn-in, we have seen leasing companies require expensive inspection fees that can exceed $500 per unit, performed by a “qualified” maintenance provider.  In addition to the expense, the interpretation of “qualified” maintenance provider is intentionally made unclear, i.e. the lessee’s maintenance provider may not be “qualified” per the lessor’s definition and may restrict the lessee’s ability to maintain equipment however you choose.  A lessee should have the flexibility to use a maintenance provider of their choice; either certified by the OEM, a 3rd party maintenance provider, or should be able to self-maintain.

Other challenges to calculating total cost may include:

  • The requirement to store off-lease equipment for extended periods of time; up to 90 days
  • “All or none” provisions
  • Fixed-term renewal rates that increase over time

Finally, if your provider does not offer an asset tracking tool in real time, that notifies you in advance of lease termination dates, then you may have difficulty making timely, informed decisions about what to do with expiring leases.

For our customers, Pacific Rim Capital eliminates all predatory terms and conditions.  We believe in transparency and ethical business practices.  We will never deceive you with a low monthly payment to win the business, only to charge exorbitant fees at the end of the lease.  At PRC, we make it easy to calculate the total cost of a lease and our Online Customer Portal will make it manageable for you to track your assets and plan for equipment refreshes at lease end.

Why do 8 out of 10 companies lease some, if not most, of their equipment?

Why is 30% of all capital equipment in America leased?

Leasing offers many benefits compared to other financing methods

Tax Deductions

The IRS says an operating lease is not a purchase. That’s because lease payments are treated as expenses on a company’s balance sheet. Instead, it is classified as a tax-deductible overhead expense.

Benefit: You can deduct the lease payments from your corporate income taxes. Plus, leasing gives you an immediate tax write-off. And you do not have to depreciate your equipment over five to seven years. 

Balance Sheet Management

An operating lease is not considered a long-term debt or liability. 

Benefit: It does not appear as a debt on your financial statement. This makes your company more attractive to traditional lenders. 

Capital Conservation

Certain types of leases help you better manage your balance sheet and improve your overall financial picture.

Benefit: You can conserve operating capital and free up working capital and bank credit lines for inventory, expansion, and emergencies. 

100% Financing:

With leasing, there is no down payment. Leasing is equivalent to 100% financing. 

Benefit: You will have more money to invest in other revenue-generating activities. 

Flexibility:

You can add or upgrade your lease at any point during the lease term. You can also add installation, maintenance, and other services to your lease. 

Benefit: Leases are more flexible than traditional financing.

Customized Solutions:

You can custom-tailor a program to fit your cash flow needs. 

Benefit: You can create a program that fits your cash flow, budget, transaction structure, and cyclical fluctuations.

Asset Management

You may use the leased equipment for specific periods of time at fixed payments. The lessor assumes and manages the risk of equipment ownership. 

Benefit: At the end of the lease, the lessor is responsible for the disposition of the asset.

Upgraded Technology

Leasing allows you to keep up with the latest technology. 

Benefit: You will never get caught with obsolete equipment and you can upgrade or add equipment to keep up with the competition. 

Speed

You can respond quickly to new opportunities with minimal documentation and red tape. Typically, your lease will be approved within one or two days. 

Benefit: You can quickly obtain your leased equipment.

Improved Cash Forecasting

Your lease payments don’t change. You will always know the amount and number of lease payments. 

Benefit: You can accurately forecast cash requirements for your equipment.

Flexible End-of-Term Options

At the end of the lease, you can return the equipment, renew the lease, or purchase the equipment. 

Benefit: You have the freedom to do what is best for your company. 

Tax Benefits

The tax benefits of ownership are passed on to you in the form of lower monthly payments. 

Benefit: You will enjoy many tax advantages.

Improved Earnings

Operating lease accounting provides a lower cost than a capital lease in the early years of a lease. 

Benefit: Your earnings will improve. 

Purchasing Power

Leasing allows you to acquire more and/or higher end equipment.

Benefit: Purchasing power is increased. 

When choosing an independent lessor, like Pacific Rim Capital, Inc., for your Material Handling Equipment (MHE) needs, it is important to understand the leasing process.

The Life Cycle of Your Deal:

1. Select Vendors and Equipment

  • Lessees have full control of choosing their vendor, manufacturer, equipment specifications, and negotiation of unit price.
  • Once a Lessee agrees to the unit price with a manufacturer, PRC can begin to price the transaction.
  • When the Lessee awards its first transaction with PRC, PRC and the Lessee must first negotiate a Master Lease Agreement (“MLA”) with PRC. The MLA lays out the terms and conditions for the relationship between the Lessee and Lessor.

2. Negotiate an Equipment Lease Schedule

  • While the MLA will include general terms and conditions that govern the relationship, the Equipment Lease Schedule (ELS) includes terms that pertain to a specific transaction or equipment type.

3. PRC to Issue Purchase Order to Equipment Manufacturer

  • Once the Lessee executes and returns the ELS to PRC, PRC would then be authorized to issue a Purchase Order (“PO”) to the equipment manufacturer. The vendor will then manufacture and deliver the equipment to the Lessee’s facility.

4. Equipment Delivery and Documentation

  • When a vendor is ready to deliver the equipment, they will provide an invoice to the Lessor.
  • Invoices provide specific details about units, such as price, delivery date, location, etc.
  • This information will be provided on lease documentation – to ensure that the units we have been invoiced for are, in fact, the units that the Lessee received.

5. Lease Commencement

  • Once all equipment has been delivered and invoices have been received, the lease is then ready to commence.
  • To commence a lease, the Lessee must sign an Acceptance Certificate (“AC”), which states that the Lessee has inspected the equipment, the equipment matches what has been ordered, and the equipment is operational.

6. Management of Assets

PRC provides additional personalized, hands-on support throughout the life of the lease by:

  • Providing account and administrative assistance when you need it.
  • Tracking your assets throughout the course of the lease ensuring that come lease end, you have maximized your ROI and your equipment has gotten the most of its useful life.
  • Giving our Lessees direct access to our STREAM Customer Advantage Portal®

7. End of Lease

When the lease is coming to maturity, the customer has a few options. They can:

  • Return the equipment
  • Purchase the equipment
  • Renew the lease terms
  • Do nothing (this then becomes a month to month rent schedule.)
  • PRC is here to coach you through your end of lease options and make an educated decision based on the previous lease terms and begin a new deal life cycle.

The life cycle of each deal moves through the same stages regardless of the company you choose to finance your Material Handling Equipment (MHE). However, the company you choose to work with for your leasing needs plays a large role in seeing who will deliver the lowest total cost and maximize the return on investment of every asset. 

By taking the time to research and choose a company like Pacific Rim Capital, Inc. to manage your financed MHE, you will be able to get customized solutions, competitive pricing, and fleet optimization services among many other cost savings benefits. In addition, you will also have access to knowledge and expertise to help you be prepared to make your experience seamless.

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Is Month-to-Month Rent Your Best Option Come Lease End?

When a lease matures, the lease payment will extend on a month-to-month rent basis until the Lessee gives notice to return the equipment or extend the lease. If a Lessee fails to make a decision, then they are leaving money on the table.

Before your lease automatically converts to a month-to-month rent, consider what your operating expenses are and identify opportunities to save.

Month-to-Month and Expected Useful Life

Month-to-month rent occurs as a default provision of the law. If a lease matures and there is no secondary agreement, a lease will automatically renew on a month-to-month basis until the lease is extended or terminated.

In terms of equipment leasing, leased assets are typically new. This means that rents are calculated based on a new asset. If a lease has gone month-to-month, then a Lessee is paying the same rent for a used asset that they were paying for a new asset.

An asset begins to depreciate the moment a user turns a unit on. In terms of forklifts, if an asset has been in rotation for 3-5 years, the asset will reach its economic useful life. Once an asset hits its economic useful life, the maintenance costs begin to spike, and the asset begins to cost more to maintain than to replace with a new asset.

If you allow your lease to automatically convert to a month-to-month rent, it is very likely that your monthly payment will remain the same as when the asset was new.

Month-to-month rents should be managed closely. PRC’s proactive, consultative, and professional approach to asset management will help you identify cost-saving renewal opportunities to help you maximize your working capital and minimize opportunity costs.

Is Month to Month Ever Necessary?

In some cases, month-to-month rent may make sound business sense for a short period of time. These scenarios include:

  • Lessees who have a new equipment requirement and need to cover the time period between their current lease and a new equipment order
  • Lessees who need a piece of equipment that is not quite released yet

Both situations consider month-to-month rents as short-term or intermediary solutions where a lessee is waiting to decide for something or waiting for something to deliver. It rarely makes sense to use month-to-month rents as a long-term business solution.

How Can PRC Help You Maximize Cost-Savings at End of Term?

The key to maximizing your cost-savings is managing your assets. We are dedicated to managing your portfolio to maximize your cost savings. We scrutinize data to ensure there are no surprises at lease end and help to make sure you are not leaving money on the table.

PRC will manage your portfolio and provide custom cost-saving solutions. When your lease comes to term, PRC will arm you with expert knowledge to provide you with the best possible solution for your equipment.

Conclusion

Lessees should avoid over exposing themselves to month-to-month rent. The overall goal is to maximize your ROI in the long run and be aware of where your lease is in every stage. Don’t get stuck overpaying on assets that should have been replaced years (or decades) ago.

There are scenarios where month-to-month rent is beneficial – but those are typically in short-term solutions. The way to maximize your ROI is to consider renewing or replacing before your equipment has reached its economic useful life and avoid spiking maintenance costs.

PRC is here to help you navigate through your lease and do the asset management for you. And, since we are not brokers or banks, we can do so with a simple and straightforward goal of helping you, the customer, to get better results.

When working to develop the terms of a lease for material handling equipment, one of the factors you must consider is the economic useful life of the asset.

This metric is important to determine the terms of any finance agreement for any piece of equipment. No matter who you select as a financier—be it a vendor, a broker, a bank, or an independent lessor— all will consider this metric to evaluate the financial terms of the agreement. But what is this metric, why is it important, and how does it impact leasing terms?

What is Economic Useful Life?

Economic useful life is a metric that helps answer questions like, “How long will this equipment be used for?” or “When does it stop making sense to continue to use the equipment?” Simply put, economic useful life calculates how well your equipment will maintain its effectiveness during the time you are leasing it. Economic useful life is not a one-size-fits-all evaluation. There are many factors such as the application of the equipment, the environment, and the type of asset.

As you use the product more, the more maintenance it will need. For example, think of a car – if your car has 100,000 miles on it, you would consider the maintenance worth the cost because the car is still viable. However, if your car has 200,000 miles on it, you might consider the costs of maintenance to be too much compared to what the car is worth.

In this case, you may be better off putting the funds towards a new car than continuing to repair the old one. The same concept applies to your equipment lease. As the use of the equipment continues, there comes a point where the maintenance costs exceed the value of the equipment.

At this point, a lessee must consider when it makes sense to continue performing maintenance on a piece of equipment as opposed to just purchasing or leasing new equipment. When the costs of maintenance outweigh the costs of the new lease or purchase, you have reached the end of the equipment’s economic useful life.

How Is Economic Useful Life Calculated?

While the concept of economic useful life is straight-forward, the calculation varies greatly depending on a number of factors. Each type of equipment is different and each company who uses the equipment is unique.

Because of this, there is not one simple equation to calculate the economic useful life of your leased equipment. It depends on the equipment and the application of the equipment and could vary from one lease to the next.

To truly determine the economic useful life of your asset, you need to be aware of factors specific to your business that will impact this. Factors can include managing your asset well throughout the course of your lease and optimizing your asset to get the most out of it while in use.

If you decide to obtain a lease through a broker or bank, they will typically not be concerned with the actual management of your assets. They are interested in your money not in your business.

However, Pacific Rim Capital, Inc. will work with you throughout the entirety of your lease to ensure you maximize the useful life of your asset while helping you to maintain a lease that will keep your total cost of ownership low.

Conclusion:

Economic useful life is an important metric that is used when financiers are developing the terms of the lease for your asset. Understanding how economic useful life works and how it is calculated can play a decisive role in what type of company you choose to finance your lease. Every company measures economic useful life differently.

A company with experience will know that a variety of factors determine the economic useful life of each individual asset. An experienced lessor will be able to identify and provide lease terms that reflect your unique business. By choosing to work with an independent lessor like Pacific Rim Capital, Inc. you will be involved with a company that provides reasonable rates and excellent service to help you focus on your core business.

Not sure where to start? Let us help you.

When you are looking at options to finance equipment, the number of choices can be overwhelming. There are many options to finance equipment and each option has its set of benefits and disadvantages. It’s important to identify the right option for your business. Let us break it down for you.

There are four different types of equipment finance:

  1. An independent lessor
  2. A bank
  3. Financing arm of Original Equipment Manufacturer (“OEM”)
  4. A broker

As with any decision, you should perform thorough research to see which option will work best for you.
However, we recommend looking past low lease rates or monthly payments and learn which option will truly give you the lowest total cost of ownership over the economic useful life of your leased asset.

Which Option Is Best for Me?

Independent Lessor

Value Proposition: Independent lessors, such as Pacific Rim Capital, Inc., have a vested interest in every transaction and a commitment to customer service. PRC’s consultative approach will help you manage your cash and your business processes. The independent lessor will be the single point of contact and play a large role in the management of your asset and lease from beginning to end.

A lessor like Pacific Rim Capital, Inc, will be able to provide asset management expertise that will allow you to receive the highest ROI from your asset while maintaining the lowest total cost of ownership. An independent lessor will be a strategic partner, helping you evaluate your lease options to align with your company’s best interests.

Bank

Value Proposition: Options for lower rates with a large amount of access to funds for financing and experience handling large or complex transactions.

Financing your asset through a bank, whether directly or through a broker, is another option for your MHE lease. When you choose a bank, you will have the option for different types of leases as well as the option for a loan. A bank will also have direct access to a large amount of funds for financing and have the experience to handle large and complex transactions.

However, when you work with a bank you typically do not have a dedicated point of contact or account manager. Because of this, the banks win. They are not aligned to your interests and are focused solely on maximizing the ROI of their investment. A Lessee could end up paying more money in the long run even though rates may appear attractive up front.

OEM

Value Proposition: Access to the newest and latest equipment directly from the manufacturer with expert knowledge about that specific brand.
When you work with the actual equipment vendor to finance your lease, their objective is to flood the market with new units. They want the old units back as quickly as possible so they can utilize them as part of their rental fleet.

Because of this, their interests are not tied to the lessee’s. Although the OEM will help you with returning the equipment at the end of the lease, it is because it is beneficial for them to have the asset back. Because of this, you won’t be accidentally pushed into a month to month or extended lease contract.

However, since it is beneficial for the OEM to receive their asset back, they might encourage you to enter into a new, more expensive lease with the “latest and greatest” product which might not always be in your best interest.

Selecting an OEM also limits your options. Choosing to lease from an OEM will restrict a lessee to choosing only the products that the OEM carries. An independent lessor will allow you to select any asset from any manufacturer. If a lessee only leases through an OEM, they will not only need to manage multiple leases with varying terms but also multiple companies with different cultures and points of contact.

Managing multiple leases with different OEMs can get quite confusing and time-consuming when it comes to all the administrative work associated with each lease. Each vendor may also require a large down payment for the assets, so you could lose out on any cost saving you may receive with monthly payments or rates.

Broker

Value Proposition: Access to a large list of banks which can help you gain competitive low rates on a lease. A broker works on commission to find the best bank to finance your loan (broker vs principal). They have access to a large list of banks and will be able to search for competitive rates and low monthly payments by comparing all your options for you.

However, brokers typically sell each transaction directly to a bank and have no interest or involvement after the initial agreement is signed. Once the deal is done, you will be working directly with whatever bank your broker found to finance the lease.

Once you are working with the bank, you will notice the same pros and cons as mentioned above. At this point, you are typically on your own when it comes to asset and lease management and you will not have one point of contact to reach out to in case of any issues.

Conclusion

While there are many different factors that come into play when searching for a financier for your MHE lease, remember to look beyond the lowest price. Instead, review each option to see which will align with your company’s best interests.

Companies who focus on low rates are typically focused on the short-term. However, the high administrative cost and internal resources needed to manage and track the assets offset initial savings over the course of the lease term.

Choosing an independent lessor, such as PRC, requires less internal resources and allows companies to focus on their core business and provides the lowest total cost of ownership.

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When evaluating your options for financing equipment, we recommend asking potential lessors whether they are a principal or a broker.

Each business model contains different risks when it comes to financing.

As your deal life cycle for your Material Handling Equipment (MHE) lease begins, you will notice that there are a few differentiating factors that stand out between working with a broker or a principal for financing.

These areas tend to include:

  • Flexibility in Price
  • Asset Management and Customer Service
  • End of Lease Options

Each of these areas will have a significant effect on how your lease will be financed and assets will be managed throughout the lease term. By taking the time to find out which financier will offer your company the most benefits, you will be able to choose whether a broker or a principal is the best choice for you.

So, how does the difference in business model affect the Lessee over the course of a lease?

Lease Terms and Vested Interest

Most lessees choose their leasing partner based on the lowest monthly payment. But just because your leasing partner provides the lowest monthly payment does not mean your leasing partner is the cheapest option.

Broker

A broker generates a lease on behalf of another. They intend to sell the lease and transfer any obligation to you immediately. They also will usually make a commission on each transaction. Because of this, your lease transaction will not be between you and a broker. It will ultimately be between the bank who finances the lease and the broker.

When a broker works to develop the terms of the lease, their pricing is limited by the flexibility of their lender. They do not have a vested interest either the lease or your business relationship. They will work with their list of banks to determine who can offer the best rate so they can close the transaction.

Principal

Unlike a broker, a Principal invests its own capital in every transaction. They have a vested interest in the performance of the lease – just like the customer. Therefore, a principal’s interest aligns with the needs of your business.

Principal will be able to be more flexible and provide customized solutions for their clients. Since they are taking a financial position in every transaction, the principal will be able to ascertain how much risk they are willing to take.

The principal also has a list of preferred lending sources they work with to get competitive rates for their customers. While their rates may vary compared to a broker, a principal will be working during your entire lease to get you the lowest total cost of ownership instead of merely the lowest rate.

Asset Management and Customer Service

After you finished negotiations and signed the paperwork, you may think that’s all you need to do. After all, you already agreed to your payments and other terms – what else could there be?

However, this is another area where you will notice a large difference between a broker and a principal when it comes to the communication and management during your lease.

Broker

Since a broker sells a transaction as quickly as possible, they will have no right to provide solutions to help you manage your leased assets. All communication will be handled by the bank who purchased your lease from the broker – if you even know who that is.

A bank is solely interested in receiving money on time. The only time a lessee would hear from a bank is when payments have stopped. Because of this, the customer is essentially left on their own.

Principal

A principal, on the other hand, will maintain communication and directly assist with lease management throughout the term of the agreement.

Principals, like Pacific Rim Capital, Inc. will advise clients on the best way to manage their assets during the lease and customers maximize the return on their investment. Pacific Rim Capital, Inc. also makes invoicing, payments, and other administrative tasks flexible and easy to manage, which creates a positive experience for clients throughout the entire lease.

End of Lease Options

The broker/principal business model also affects decision-making at the end of term. At the end of a lease, a Lessee must decide to return, renew, or purchase their leased asset.

So, what is the difference between how a broker and a principal handles a lease at the end of term?

Broker

Since a broker does not maintain a vested interest in the lease transaction, they will usually be long gone when the lease matures. Therefore, if a customer is not actively managing their leases and do not inform the bank of their decision, they lose money at the end of term.

Most often, these consequences are the rent extending on a month-to-month basis, which could lead to the customer spending more money on the back end, despite realizing some cost-savings on the front-end.

For this reason, lessees and prospective lessees should be wary of unscrupulous business practices that cause costs to spike at the end of term, such as automatically renewing leases.

Principal

A principal has a vested interest in the performance of your lease transaction. As a dedicated point of contact, a principal will likely remain in contact with you through the entire lease term. This helps customers make better decisions about end of lease options and identify cost-saving opportunities.

Be wary: not all principals are committed to providing transparency and excellent customer service like Pacific Rim Capital, Inc. For example, at Pacific Rim Capital, Inc., we work with our customers to determine what the best choice is based on a number of criteria, including the asset’s economic useful life.

With nearly 30 years’ experience, Pacific Rim Capital Inc. can provide expert advice and creative solutions to help you maximize your ROI on any leased asset.

Conclusion

Principals and brokers have different business models and different objectives. These differences affect the customer relationship and the management of assets throughout the lease term. When selecting an equipment finance partner, be sure to research every potential partner carefully to determine the best fit for your organization.

As you are investigating your equipment financing options, you will be faced with the choice of purchasing or leasing the assets.

Since each company has its own requirements, it is important to know which option best fits your needs.

So how do you decide? By way of analogy, think of buying or leasing a new car.

When you are looking into getting a new car, you must determine your intent and ideal outcome. Are you looking for a long-term investment? Will you take the time or have the finances to keep the car maintained? Will you be putting a large number of miles on the car or using it to commute? If so, purchasing a car may be a better option for you since you are willing to put the time, energy, and finances into maintaining and using the car.

But, on the other hand, you may not want to provide a large down payment and tie up your cash. You may not want to pay for maintenance. You may even just like the idea of refreshing your car and receiving a new one every few years. In this case, you would be much better off leasing a car instead of purchasing.

There are pros and cons in either scenario. When you purchase a car, you own the asset yourself and increase your net worth. When you lease a car, you don’t own the asset and thus are subject to special provisions on that asset.

Your choice to lease or purchase the car fully depends on your intent and how you plan on using the car. The same goes for material handling equipment. Depending on your intended usage, one choice will clearly be the right one for your business. But what are the benefits of each choice and how do you know which is right?

The Benefit of Leasing Equipment

As with a car, leasing material handling equipment is best suited for companies who are looking to focus on their core business, maximize their working capital, and lowering their total costs. Leasing allows companies to hedge against technological obsolescence. Think about computers – why would you want to own a computer for seven years if it will be obsolete in three?

Leasing equipment is a good choice for companies who do not want to put the time or money into maintaining the equipment past the economic useful life of the asset. After a certain number of hours of use, the asset becomes more costly to maintain than it is worth. This can negatively impact operational efficiencies and your company would be better off replacing the equipment instead. Read more about the economic Useful Life of Equipment by clicking the button below.

Economic Useful Life of Equipment

The Benefit of Purchasing Equipment

If you intend to own or use the asset past its economic useful life or require a piece of extremely rare, unique, or highly specialized equipment—or just like to spend cash—then it may make sense to purchase the asset or to finance through a capital lease.

Purchasing an asset would make sense for companies who have the time or finances to keep up with the equipment they use. If these companies know that they will be using the equipment to produce products that will not become obsolete and the assets will continue to be beneficial beyond their economic useful life, then purchasing might be a better option.

How to Choose

As you are looking at the pros and cons of leasing or purchasing your assets, you must recognize what your intent is for the use of the asset. If you intend to refresh your assets or you need new equipment to stay relevant, then leasing will be the better option for you.

Do you have cash flow or liquidity issues? Do you want to focus on your core business? Then leasing might be your best option.

If you do not mind spending money and administrative resources in managing equipment, then purchasing might be your better option.

Once you determine which option is best for you, you can then choose the right financier for your lease, loan, or purchase.

How Will FASB ASC 842 Affect Lease Accounting and Your Business?

The Financial Accounting Standards Board (“FASB”) have begun implementing the new accounting rules for leases this year.

At the high level, FASB Accounting Standards Codification (“ASC”) 842 reduces some of the financial advantages of leasing by placing operating leases on the balance sheet and modifying how companies account for rentals. However, before diving into the technical aspects of lease accounting, let’s make sure we cover the basics.

What is a lease?

In a lease, one party obtains the right to use an asset legally owned by another party for a period of time.

Under the FASB model, a lease was classified based on whether the arrangement effectively purchases an asset. If a lease transfers the control of the underlying asset to a lessee, e.g. equipment has no value at the end of term or lessee can purchase equipment at a nominal value at end of term, then it will be classified as a finance lease.

Otherwise, where a lessee obtains control only of the use of an asset for a limited duration and the equipment retains value at the end of the lease term, the lease will be classified as an operating lease.

How will FASB ASC 842 affect accounting methodology?

For lessors, accounting methodology remains largely unchanged. For lessees, there are significant differences.

Historically, operating leases were not placed on the balance sheet. This provided value to lessees who were motivated by financial engineering or those who sought to mitigate expenses on their books. In addition, the new FASB rules have also changed the methodology for depreciating rentals. Previously, rentals were expensed in a straight-line depreciation. Now, rentals will be considered a depreciating asset called a “Rights to Use,” which is an asset that Lessees do not own, but must place on their books.

When will ASC 842 go into effect?

ASC 842 went into effect for the annual period beginning December 15, 2018 and the calendar year 2019 for public entities. For other entities, ASC 842 went into effect for the annual period of December 15, 2019 and the calendar year 2020. Public entities that present three years of income statements and cash flows must prepare the balance-sheet effect of the adoption of ASC 842 as of January 1, 2017.

What are the effects of the ASC 842?

Experts believe that the new standard will have a material balance sheet impact on about 80% of companies. In addition, the new rule will have a substantial financial impact on public companies. It will add millions of dollars in liabilities, in some cases billions, to corporate balance sheets.

What must your business do to implement ASC 842?

Successful implementation of ASC 842 requires considerable time, resources, and expertise. All things that most businesses lack – especially when it relates to non-core business activities. Many companies appear to be dragging their heels when implementing the new standard.

According to a Q4 2018 study conducted by PwC, only 4% of public company respondents had completed their ASC 842 implementations with 91% of respondents stating that they had not yet completed or started the assessment.

The main challenges to implementation include the consolidation and population of lease data, data analysis, and enhancing or changing systems, processes, or controls. Furthermore, due to the complexity of the new lease accounting rules, most companies must upgrade or modify their existing accounting system or implement new systems to handle the accounting requirements.

Here are a few steps to consider for your company:
1. Review all equipment lease and rental contracts
2. Identify technology requirements
3. Review debt covenants
4. Seek out expertise and counsel
5. Enact a plan and execute

What is the impact of ASC 842 on the future of equipment leasing?

The good news is that the future remains bright. A majority of U.S. business finance their equipment acquisitions and will be able to do so under ASC 842 for the following reasons:

  • Tax Management – Leasing allows lessees to manage taxes, by allowing lessors to pass benefits through lower rates.
  • Financing – Lessees are still able finance the entire cost of equipment, software, and services without a down payment.
  • Cash flow management – Lessors are still able to create smaller, flexible arrangements while the equipment generates revenue.
  • Hedge against inflation – Leases allow lessees to lock rates to avoid future inflation.