What organizers should know.
For decades, operating leases have been used to acquire capital expenditures without the direct balance sheet implications that affect leverage.
In early 2019, new accounting rules for leases went into effect that bring operating leases onto the balancing sheet.
For decades, operating leases have been a vehicle to acquire assets without the direct balance sheet implications that might affect leverage or even covenant compliance. While most firms are prepared for the new accounting standard, does that equate to a return to traditional debt financing of capital expenditures and an exit of operating leasing as a potential financial solution?
Not so fast.
The primary impact of operating leasing is a more affordable approach to how your company uses assets. in an environment that demands that you stay on the cutting edge of technology and ever-increasing replacement cycles challenge financial managers, operating leases can still be beneficial.
Despite the recent accounting changes, there are still ongoing financial and operational benefits of operating leases worthy of consideration.
Unlocking Productivity and Personal Growth through the Importance-Urgency Matrix
Leasing Accounting
1. What Organizations Should Know
Lease
Accounting
(800) 752-1882 contact@forkliftsystems.com
Contact Us
2. About Us
PROUDLY IN SERVICE
40+ YEARS Locations
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Forklift Systems is a 40+ year old, privately held, family owned full service material handling
company. Founded in 1978 and headquartered in Nashville, Tennessee, we have multiple
locations serving thousands of customers in Alabama, Kentucky, Indiana, and Tennessee.
Our focus is in helping our customers achieve the absolute lowest lifetime cost when
purchasing and maintaining powered industrial equipment. By providing outstanding
equipment, and partnering with our customers, we provide ownership and maintenance
programs that cut the time and cost associated with owning material handling and forklift
fleets.
Our award winning service company is a one stop source for all your material handling
needs including forklifts, aerial lifts, rack systems, industrial vehicles, floor sweepers and
scrubbers, and much more.
We offer many top brands like JLG, Genie, Advance, UniCarriers, and Doosan. Services
include forklift operator training and safety courses, parts programs, and fleet maintenance
programs. We can help design your warehouse and provide engineered rack system layouts
for your facility.
Give us an opportunity and discover the Forklift Systems difference.
3. Operating Leases
Operating leases align with the operational use of the equipment, so they can be an
ideal solution for equipment that becomes obsolete or outdated frequently. From IT to
machine tools, understanding the life cycle of the equipment is key.
For decades, operating leases have been used to acquire capital expenditures without the
direct balance sheet implications that affect leverage.
In early 2019, new accounting rules for leases went into effect that bring operating leases onto
the balancing sheet.
For decades, operating leases have been a vehicle to acquire assets without the direct balance
sheet implications that might affect leverage or even covenant compliance. While most firms
are prepared for the new accounting standard, does that equate to a return to traditional
debt financing of capital expenditures and an exit of operating leasing as a potential financial
solution?
Not so fast.
The primary impact of operating leasing is a more affordable approach to how your company
uses assets. in an environment that demands that you stay on the cutting edge of technology
and ever-increasing replacement cycles challenge financial managers, operating leases can still
be beneficial.
Despite the recent accounting changes, there are still ongoing financial and operational
benefits of operating leases worthy of consideration.
3
STILL VIABLE AFTER ACCOUNTING RULE CHANGES
Flexibility
Operating leasing is a valuable tool when equipment is needed to support a specific customer
agreement with a finite term. Contract manufacturers are seeing production agreements take
increasingly shorter terms yet may require six to eight figure investments in capital equipment
to effectively fulfill the agreement.
4. An operating lease offers the flexibility to acquire the equipment and essentially pay for the
use of the assets in a term that aligns with the contract manufacturing term -- reducing risk
and preserving capital. Construction industries and many other industries may find operating
leasing as more effective solution than long-term rental. This finance approach offers a
company the ability to lease equipment customized to their needs for a lower financial
obligation than renting standardize assets.
Paying for the use of the equipment rather than the ownership of it can offer flexibility
in demanding budget situation as well. An operating lease can be easily structured with
payments that step up and step down to more easily match revenues and expenses and can
include buyout options.
4
Cash Flow & Depreciation
Purchasing assets and equipment often involves an upfront outlay of cash either as a down
payment on financing or in total if the purchase is for cash outright. If the equipment isn’t
needed for long-term usage, why tie up cash in this type of purchase?
Most operating leasing requires little upfront investment in cash reserves, allowing companies
to preserve capital for high-return investments rather than depreciating assets.
Additionally, by structuring payments around the term of your use, you may see a lower
monthly payment. in these cases, budget savings can be redeployed in other areas or even
reinvested in the equipment or project to deploy more or better equipment than originally
sought. Depending upon your company’s financial situation, you may or may not be able to
take full advantage of the depreciation write-offs over time, or the upfront Section 179 or
bonus depreciation options.
5. 5
If your company is suffering lower profits, carrying Net Operating Losses (NOLs) or falling into
an Alternative Minimum Tax (AMT) reduction of potential deductions, then the depreciation
benefits may not be of value and therefore negate on of the advantages that purchasing or
traditional debt financing can offer.
There are still tax benefits of leasing even without the depreciation write-offs available with a
purchase. operating lease payments are a deductible expense.
Disposition
When equipment is
purchased with cash or
acquired with a loan/capital
lease, the issues of disposing
of the equipment and a
residual value can come into
play. Most companies are
not experts at maximizing
gain on sale of equipment
at the end of its useful life
in the secondary market
or even have a plan to
affordably dispose of
outdated technologies.
With a piece of heavy equipment in a manufacturing facility, you will have to hire someone
to come and physically remove it or possibly return the equipment at the end of the lease.
Beyond that, there may be disposal issues, including the need to comply with environmental
regulations as applicable- not to mention the operational impact of having a team of
employees who are not experts handle these matters.
Operating leases can help by including purchase options and even the ability to return the
leased equipment in part or in whole at the end of term. These end-of-term options offer
companies a plan to dispose of assets that may reduce cost and risk while making it easier to
upgrade to newer technologies.
6. 6
Summary
While the new accounting rules eliminate the off-balance sheet nature of operating leases, this
type of lease structure can still offer advantages in leasing assets and equipment ranging from
computers to aircraft.
CAN OPERATING LEASES BENEFIT YOUR BUSINESS?
Discover your options and learn how an operating lease can benefit your business by
connecting with a Forklift Systems Inc. leasing specialist.
1. newconstructs.com/the-impacts-of-operating-leases-moving-to-the-balance-sheet/
2. advantageleasing.com/advantage-of-operating-leasing/
3 efinancemanagement.com/sources-of-finance/difference-between-operating-and-financial-lease
4. waypointleasing.com/operating-leases/
5. corporatefinanceinstitute.com/resources/knowledge/accounting/capital-lease-vs-operating-lease/
6. accountingtoday.com/opinion/how-fasb-asc-842-leasing-standard-transition-option-will-affect-leasses-and-investors
7. TENNESSEE HEADQUARTERS
884 Elm Hill Pike
Nashville, TN, 37210
615-255-6321
contact@forkliftsystems.com
ALABAMA HEADQUARTERS
132 West Park Drive
Birmingham, AL, 35211
205-945-1112
contact@forkliftsystems.com
KENTUCKY HEADQUARTERS
4300 Chef’s Way #2
Louisville, KY 40218
502-654-8999
contact@forkliftsystems.com
Contact Us
Do you have equipment needs right now? Can’t find something you are looking for or need?
Email or call us at one of the locations below.
Get in touch with someone
in equipment sales.
800 - 752 - 1882
www.forkliftsystems.com
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