True Leases - True Challenges

by Steve Chriest

Even industry experts agree that lease accounting standards are arcane and esoteric. It doesn't seem to be a question of “if,” but “when” the SEC gets its way and has the current lease accounting standards rewritten. When this happens, the leasing industry, as it has existed during the last thirty years, will change, and those leasing salespeople involved in so-called structured transactions will have to change the way they sell.

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 an estimated $1.25 trillion (undiscounted) in future payment obligations off their balance sheets!

Robert Herz, chairman of the Financial Accounting Standards Board (FASB), agrees with the SEC. He questions why companies that acquire even essential assets, and incur a non-cancelable obligation to pay for them over time, want to keep the assets and the payment obligations off their balance sheets. The concern, of course, is with accounting transparency, and with ensuring the ability of investors to accurately evaluate a company's true financial condition.

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, now is the time to prepare a game plan for competing in a new accounting environment. 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.

The end of true leases 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.

Copyright © 2006 Selling UpTM. All Rights Reserved.

About the author: Steve Chriest is the founder of Selling UpTM (www.selling-up.com), a sales consulting firm specializing in sales improvement for organizations of all types and sizes in a variety of industries. He is also the author of Selling Up, The Proven System For Reaching and Selling Senior Executives. You can reach Steve at schriest@selling-up.com.