Leased lift trucks: back on your books?

There are some changes in the works that could affect the economic benefits you enjoy from leasing lift trucks. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are collaborating to develop a new model for recognizing assets and liabilities under lease contracts. The proposed new standard is expected to affect the balance sheets of all companies that lease equipment.

Under the existing standard, a company must classify and account for leases as operating or capital leases, depending on whether the lease transfers all or substantially all of the risks and rewards incident to ownership. The capitalization model would require companies to initially account for every lease contract’s rights as assets and obligations as measured by the present value of the expected lease payments. It would also require that the subsequent accounting for all leases, regardless of their substance, be accounted and presented in the balance sheet, income statement and cash flow statement.

Ralph Petta, vice president of research and industry services for the Equipment Leasing and Finance Association (ELFA), told me this could change the benefits of leasing for some businesses.

“Instead of taking operating lease treatment, where another party owns the asset and puts the asset on its books, and the lessee just pays a monthly expense, the lessee would have to recognize those assets on their balance sheet,” he explains.

ELFA President Kenneth E. Bentsen, Jr. explains his concern:

“If the proposed changes do not reflect an appropriate balancing of costs and benefits, they could result in an unwarranted increase in cost of capital to U.S. companies that utilize leasing as a means of capital formation through the acquisition and investment in capital plant and equipment or real estate.”

All leases will likely be affected as soon as the standard is effective but the Boards have not yet discussed the method of transition or the effective date. The Boards are seeking comment on this until July 17, 2009.

Let me know if you care about this and how it might affect your business.

Tom Andel
tandel4315@aol.com