CFO Research and CIT Group examine the impacts of a new lease accounting standard for mid-size businesses. View the report.

1. Impacts of a New Lease Accounting
Standard for the Mid-Sized Business

2. CFOPUBLISHING 1
Impacts of a New Lease Accounting Standard for the Mid-Sized Business

CONTENTS
About This Report...............................................2
Using Leasing to Help.........................................3
Grow Your Business
Business Needs Come First................................4
Reexamining Financing.......................................5
Options After the Change
Does Forewarned Translate................................7
into Forearmed?
Getting Ready for Change...................................9
Sponsor’s Perspective...................................... 10

3. CFOPUBLISHING 2
Impacts of a New Lease Accounting Standard for the Mid-Sized Business

ABOUT
THIS
REPORT
In August of 2015, CFO Research surveyed senior finance executives
at small and mid-sized companies in the United States, examining the
impact that the proposed accounting change to move operating leases
onto the balance sheet might have on those companies’ business deci-
sions. This report is based on 158 survey responses from finance execu-
tives at U.S. companies with between $25 million and $1 billion in an-
nual revenues.
The survey and this report, which were sponsored by the middle mar-
ket lender CIT Group, represent views from a broad range of compa-
nies, as follows:
TITLE
Head of finance (CFO, finance
director, or equivalent).......................... 72%
CEO, president, managing director,
or equivalent..........................................11%
Controller..............................................10%
Treasurer.................................................3%
Other executive with finance
responsibilities....................................... 3%
Other...................................................... 1%
REVENUE
$25 million - $99 million........................33%
$100 million - $249 million...................33%
$250 million - $499 million...................23%
$500 million - $749 million.................... 7%
$750 million - $1 billion...........................4%
INDUSTRY
Financial services/Insurance................. 13%
Wholesale/Retail trade.......................... 13%
Auto/Industrial/Manufacturing.............11%
Construction...........................................8%
Business/Professional services................8%
Health care.............................................7%
Education................................................6%
Transportation/Warehousing..................5%
Government/Public sector/Nonprofit......4%
Chemicals/Energy/Utilities.....................4%
Real estate development.........................4%
Food/Beverages/Consumer packaged
goods......................................................4%
Hardware/Software/Networking............3%
Telecommunications...............................2%
Pharmaceuticals/Biotechnology/
Life sciences............................................2%
Media/Entertainment/Gaming................2%
Natural resources/Mining....................... 1%
Aerospace/Defense................................. 1%
Travel/Leisure......................................... 1%
Other...................................................... 1%
OWNERSHIP
Private...................................................63%
Public.................................................... 15%
Nonprofit...............................................11%
Subsidiary of a U.S. corporation...............5%
Government............................................4%
Subsidiary of a foreign corporation......... 2%
ACCOUNTING STANDARD
U.S. GAAP.............................................93%
Modified U.S. GAAP.................................3%
IFRS........................................................2%
Other......................................................3%
Note: Percentages may not total 100% due
to rounding.

4. CFOPUBLISHING 3
Impacts of a New Lease Accounting Standard for the Mid-Sized Business

USING LEASING TO
HELP GROW YOUR
BUSINESS
For many companies, it appears that
leasing is here to stay. Especially for mid-
sized companies that are growing and
striving to succeed, finance executives
view leasing as an important financing
strategy.
However, the Federal Accounting
Standards Board (FASB) is working on a
change in the lease accounting standard
that is giving finance executives reason
to pause and reexamine their financing
options. The proposed change would
move all long-term operating leases onto
the balance sheet as non-debt liabilities.
At this point, finance executives have
questions about how the change would
impact their reporting of liabilities, and
potentially alter key financial metrics
such as ROA, debt-to-equity, and
cash flow. For this reason, they also
have questions about the proposed
accounting change’s ripple effects on
operating decisions and on a company’s
ability to meet the terms of previously
negotiated bank covenants.
To help gauge the potential scope of
these concerns, CFO Research, in collab-
oration with CIT Group, surveyed finance
and corporate leaders from small and
mid-sized U.S. companies. The message
from the 158 respondents who participat-
ed in the survey is loud and clear: Leases,
and in particular operating leases, are
core elements in many of their growth
strategies, and so it will be important to
understand the consequences for their
business of changing the accounting
standard.
The survey shows that almost two-
thirds (65%) of respondents rank leas-
ing as either critical to or an important
part of their company’s growth over the
next two years. (See Figure 1.) Mid-sized
companies, such as those represented in
our survey, are eager to grow, too. About
one in five respondents (18%) say their
companies have aggressive growth plans
over the next two years, and more than
half (53%) have moderate growth plans.
As an example, one respondent—the
head of finance for a mid-sized, private
FIGURE 1
FOR A MAJORITY OF MID-SIZED COMPANIES IN THE SURVEY,
LEASING IS AN IMPORTANT PART OF GROWTH STRATEGIES.
Leases (large-ticket equipment
or vehicles, real estate, other)
will be ___ for my company’s
growth over the next two years.
Percentages of all respondents.
■ Critical or important
■ Minor, not important,
or not sure Other
17%
What types of leases will be
important or critical to your
company’s financial strategy?
35%
65%
Real estate
24%
Large-ticket
equipment or
vehicles
23%

5. CFOPUBLISHING 4
Impacts of a New Lease Accounting Standard for the Mid-Sized Business
By far, the largest
number of respon-
dents (45%) say that they primarily uti-
lize operating leases, rather than capital
leases, and another quarter (23%) utilize
a mix of both. Many finance executives
prefer operating leases, in particular, for
the operational and financial flexibility
they provide. (See Figure 2.)
Cash flow requirements (selected by
43% of respondents) and operational
requirements or business growth (41%)
are the two most important factors driv-
ing mid-sized companies’ decisions on
whether to increase or decrease leasing
activity. “It is all about current and pro-
jected cash flow,” says the head of fi-
nance for a small private company in the
media/entertainment/gaming sector.
financial services company—explains
how leasing considerations figure into
the company’s growth plans. He writes,
“We employ leasing now due to the
ability to carry less debt on our balance
sheet, so as to free up financing for other
capital improvements.” If FASB’s
proposed accounting change were to
place more debt on the balance sheet,
the factors in the financing equation
could end up having different values for
this company.
Other companies turn to leasing for
direct operating benefits. The corpo-
rate head of a mid-sized company in the
natural resources/mining sector writes,
“Large capital equipment incorporates
the latest technologies and these im-
prove our operating efficiencies, so we
want to be using the latest equipment.”
Leasing contracts afford companies like
this the flexibility they need to survive
and succeed in the face of rapid techno-
logical advances.
It makes senses, then, that finance ex-
ecutives will want to make sure they un-
derstand how FASB’s proposed account-
ing change may affect the calculations
they use in evaluating the suitability of
leasing for their particular companies.
BUSINESS NEEDS
COME FIRST
“Large capital equipment incorporates
the latest technologies and these improve
our operating efficiencies, so we want to be
using the latest equipment.”


6. CFOPUBLISHING 5
Impacts of a New Lease Accounting Standard for the Mid-Sized Business
However, few respondents (6%) believe
that the new standard will actually make
leasing a more attractive financing op-
tion for them, although 10% believe that
short-term leases (i.e., those not subject
to the new standard) will become more
attractive. A larger number of respon-
dents (26%) express concern that the
REEXAMINING
FINANCING OPTIONS
AFTER THE CHANGE
As the head of finance for a mid-sized
private company in the wholesale/
retail sector writes, “My company prefers
to lease long-term assets and have the
flexibility to upgrade when technologi-
cal upgrades warrant it.” The controller
for a small private construction company
concurs, pointing out, “If the economic/
business environment has changed, we
are not tied to a piece of equipment we
potentially may not need.”
Leasing can provide financial flexibil-
ity in the service of business growth, as
well. The head of finance for a mid-sized
private company in the wholesale/retail
sector explains, “We are a highly lever-
aged company, and leasing allows us to
continue to renew our capital base with-
out large outlays of capital.”
For these types of reasons, many com-
panies are unlikely to change their busi-
ness practices solely to accommodate
the accounting change. In fact, a major-
ity (65%) do not expect the new standard
will force changes in their current leasing
portfolios. As the head of finance from a
private company in the wholesale/retail
sector notes, “Presently we do not antici-
pate any changes to the type or number
of leases we employ.”
This finance executive goes on to ex-
plain his reasoning: “We basically reach
a determination based on the ROI and
not how it'll be classified in the financial
statement. As a private company, we do
not have external pressures that influ-
ence the results of operations when it
comes to recording a transaction.” Or, as
the head of finance from a professional
services firm succinctly puts it, “We will
not let the tail wag the dog.”
FIGURE 2
MID-SIZED COMPANIES IN THE SURVEY RELY MORE HEAVILY
ON OPERATING LEASES THAN ON CAPITAL LEASES.
Overall, which types of leases does your company
currently employ the most?
Percentages may not total 100% due to rounding; 19% said "Neither."
■ Primarily capital leases ■ Mix ■ Primarily operating leases
Capital leases Operating leasesMix
45%23%13%


7. CFOPUBLISHING 6
Impacts of a New Lease Accounting Standard for the Mid-Sized Business
new lease accounting standard will make
leasing a less attractive financing option,
and slightly fewer than one in five (18%)
expect their current leasing portfolios will
decrease.
Many respondents express their dis-
pleasure with the anticipated cost and
disruption involved with changing their
financial statements. In that way, writes
the head of finance for a mid-sized pub-
lic company in the pharmaceuticals/
biotechnology/life sciences sector, “The
new standard makes leasing less attrac-
tive than it is today due to the complexity
and work required by the new standard.”
Ambitious mid-sized businesses are un-
derstandably reluctant to commit scarce
resources to reconfiguring their books
when they can be better deployed in pur-
suit of growth opportunities.
The most dramatic opinion is ex-
pressed by the head of finance for a small
private construction company (less than
$100 million). This respondent writes,
“[T]he attractiveness of operating leases
on vehicles will evaporate….Operating
leases are a more costly option without
any positive balance sheet impact.” As an
alternative, he continues, “We'll finance,
own, and then sell the asset down the
road”—essentially forcing this company
to trade the flexibility of leasing for the
challenges and risks of ownership.
When asked to express their prefer-
ences (if any) for alternative financing
arrangements, respondents clearly opt
for debt financing or cash flow over eq-
uity financing. (See Figure 3.) More than
a third (36%) would be more likely to em-
ploy debt financing; 30% would be more
likely to use operating cash flow; and
10% would be more likely to employ eq-
uity financing. (Note that these choices
were not exclusive of each other, and so
some respondents selected more than
one.) “We will go from leasing to buying,”
says the controller for a mid-sized private
manufacturing company.
Even companies that keep up their
lease portfolios will feel some degree of
fallout from the accounting change. At
the very least, says the corporate head
of a mid-sized transportation company,
“Leases will be renegotiated to comply
with acceptable lease standards.” Anoth-
er respondent, who is the head of finance
for a mid-sized private construction com-
pany, writes, “Currently, the debt/lease
decision may change somewhat. Prob-
ably [our] largest concern is [the] impact
upon bank covenants, bonding capacity,
and other areas of that nature.”
FIGURE 3
FINANCE EXECUTIVES WOULD PREFER DEBT FINANCING
AND USING OPERATING CASH OVER EQUITY FINANCING, IF
THEY WERE CONSIDERING ALTERNATIVES TO LEASING.
If the new lease accounting standard is implemented, which of the
following alternative financing strategies, if any, are you more likely to
employ instead of leasing?
Percentages may not total 100% because multiple choices were allowed.
None of the above; the changes in
the standard won’t affect our
consideration of alternatives to leasing
Other
Equity financing
Operating cash flow
Debt financing
40%
1%
10%
30%
36%
“Probably [our] largest concern is [the]
impact upon bank covenants, bonding
capacity, and other areas of that nature.”

8. CFOPUBLISHING 7
Impacts of a New Lease Accounting Standard for the Mid-Sized Business
DOES FOREWARNED
TRANSLATE INTO
FOREARMED?
For certain companies, finance execu-
tives express concern over whether the
consequences of the accounting change
could even extend to how manage-
ment and stakeholders evaluate busi-
ness performance. The head of finance
for a business services company writes,
“We lease real estate for both store and
Uncertainty is one of the most commonly
cited sources of respondents’ discomfort.
It may be a case of fearing that what they
don’t know could very well hurt them.

“We lease real estate for both store and
warehouse locations as well as over 200
trucks—we have good business reasons for
leasing and the new accounting rules do not
impact those. [But] it will have very broad
implications for the benchmarks that we use
to measure our business success.”
More than four in ten (43%) report
feeling left in the dark—nearly a quarter
(23%) of the respondents say that they
do not feel very well informed about the
warehouse locations as well as over 200
trucks—we have good business reasons
for leasing and the new accounting rules
do not impact those. [But] it will have
very broad implications for the bench-
marks that we use to measure our busi-
ness success since Return on Net Assets
(RONA) is a key performance indicator
and management bonus component.”
A few respondents—including some
who may continue to employ leasing—
go so far as to say that they fear the cost
of making the accounting change will be
high enough to pose a potential threat
to their companies. The head of finance
for a mid-sized private company in the
wholesale/retail sector sums up these
concerns when he writes, “The assets
we currently lease are critical to our busi-
ness. As such, we'll have to continue to
acquire [them], either through lease or
purchase….The cost, both monetarily as
well as structurally, of renegotiating our
banking covenants to accommodate this
standard will likely be significant enough
to slow our forward momentum.” How
much these fears will be borne out in the
final FASB proposal and during the imple-
mentation period remains an area of
uncertainty for the finance executives in
the survey.

9. CFOPUBLISHING 8
Impacts of a New Lease Accounting Standard for the Mid-Sized Business
FIGURE 4
MANY FINANCE EXECUTIVES FEEL UNDERINFORMED ABOUT
THE IMPACTS THE PROPOSED ACCOUNTING CHANGE MAY
HAVE ON THEIR COMPANIES.
How well informed do you feel you are about the proposed
changes in the lease accounting standard, and how they will
affect your company?
Not applicable
Very well
informed
As informed as
I need to be
Not very well
informed
It’s still too early
to tell
23%
32%23%
20%
3%
Percentages may not total 100% due to rounding
impacts of the new accounting standard
on their companies, and another 20% say
that it’s too early to tell, so they are wait-
ing for a final decision before evaluating
the impacts. (See Figure 4.)
FIGURE 5
RELATIVELY FEW COMPANIES IN THE SURVEY HAVE ALREADY
TAKEN ACTION TO ESTIMATE THE IMPACTS OF THE PROPOSED
ACCOUNTING CHANGE ON THEIR FINANCIAL STATEMENTS.
Has your company modeled the potential impact of
the proposed changes [in the lease accounting standard]
on its financial statements?
I’m not sure
No, and we have no plans for
evaluating the impacts
No, but we plan to evaluate the
impacts at the appropriate time
Yes, at the level of estimating impacts
on specific line items
Yes, we have done detailed modeling
or developed pro forma statements
13%
2%
41%
37%
7%
In fact, nearly eight out of ten respon-
dents (78%) have yet to evaluate the po-
tential impact of the proposed changes
on their financial statements—41% plan
to evaluate impacts “at the appropriate
time,” and 37% have no plans to evaluate
impacts at all. Only 20% of respondents
have already performed detailed model-
ing of the impacts, developed pro formas,
or estimated impacts on specific line
items. (See Figure 5.)
While they wait, most of the respon-
dents (73%) say their companies will
“continue with business as usual”—
probably out of necessity, as no company
can afford to sit idle while waiting for res-
olution. But the fallout from this degree
of uncertainty, writes one executive in
the survey, is that he will be approaching
the implementation of the new standard
“with a lot of caution.”
Others express similar views, and 45%
of the respondents either do not believe
their companies are well prepared to
adapt their financing strategies to the
proposed change (34%), or simply don’t
know if they are prepared (11%). Even at
companies where leasing is an important
part of growth strategies, similar num-
bers of finance executives say they are
not feeling prepared.
In some cases, the continuing uncer-
tainty surrounding the implementation
of the new standard is also causing mid-
sized companies to put off making any
changes to the status quo until they have
better information. “We are growing so
quickly but are really uncomfortable with
the current US regulatory environment
[and so] we can't plan our leasing activity
too far in advance,” notes the corporate
head of a mid-sized, public financial ser-
vices firm.

10. CFOPUBLISHING 9
Impacts of a New Lease Accounting Standard for the Mid-Sized Business

GETTING READY
FOR CHANGE
In playing the waiting game, companies
may be at risk of falling behind. Even if
the proposed accounting change doesn’t
alter the outcomes of financing deci-
sions, it stands a good chance of altering
the process of making those decisions.
Finance executives will need to prepare
themselves and their companies for the
additional complexity of weighing their
financing alternatives, as well as the ad-
ditional costs involved in switching over.
To make sure they are well prepared
to continue to take full advantage of the
value and flexibility that operating leases
provide, finance executives at mid-sized
companies may need to ask themselves
several key questions about the role that
leasing plays in their financing strategies
and how the upcoming change in the ac-
counting standard can affect those delib-
erations.
1
What are the key metrics underlying your financing decisions?
How will the accounting change affect those factors?
2
Will your company need to trade off operational and strategic benefits
of leasing with the cost of implementing the accounting change?
3
How ready is your company to act when it needs to?
Do you have a good idea of how much time and effort it will take your
company to adapt to the new standard?
4
Do those responsible for setting the direction for your company—
your C-suite, board, owners, and shareholders—understand what will
change for your business, and what won’t?
5
What can you and your finance team do now to prepare
yourselves, and others in your company, for making the transition
with the least disruption to your business?
5 KEY QUESTIONS

11. Impacts of a New Lease Accounting Standard for the Mid-Sized Business
10

SPONSOR’S
PERSPECTIVEThere are many things for organizations to consider when evaluating whether to lease or buy the equip-
ment required to run their operations. Despite potential upcoming changes in lease accounting, the ben-
efits of leasing remain.
Leasing offers a multitude of financial, strategic, and operational benefits when compared to incurring
100% of the expense upfront, as is the case with outright purchase. Manageability, security, taking
advantage of the latest innovations, upgrade flexibility, operational flexibility, conservation of capital
and lines of credit, reducing environmental disposal risks, and budget and payment flexibility are among
them.
When undertaking a lease versus buy analysis, it’s important to factor in maintenance and support costs
as well as “end of life” costs such as decommissioning expenses. A study by market research firm IDC
suggested that many times, these are not factored in appropriately. When purchasing and holding onto
equipment for longer periods of time, maintenance costs rise. These cost increases are driven by two key
factors:
• Mechanical failures—as machines age, they have many more maintenance "events" resulting in high-
er expense
• Unbudgeted or unplanned costs of updating software configurations as updates become available or
infrastructure changes
Leasing makes it easy to acquire, manage, and control assets. Here are 5 reasons to lease:
1. Protection Against Advancing Technology
Leasing enables you to stay on top of technological advances with minimal financial impact or risk,
and deliver increasing value to your customers while staying ahead of your competitors. You can
add-on or upgrade during the lease term. At the end of the lease, choose to return or purchase the
equipment.
2. Predictable, Low Monthly Payments
Leasing enables you to pay over time, rather than invest a lump sum up front. Lease payments can
be tailored to budget levels or revenue streams and may be tax deductible.
3. Lower Upfront Costs
Leasing reduces upfront costs, enabling you to obtain the assets you need now without impacting
cash flow. It preserves working capital and existing credit lines, freeing up cash for other operational
expenses.
4. Flexible Pay Structures
Leasing provides flexibility that purchasing does not offer, including: 100% financing with no
money down, payment structures that match cash flows or business cycles, and a variety of end-of-
lease options.
5. Ability to Bundle Costs
Leasing offers you the ability to finance hardware, software, and services in one transaction.
The convenience of one-stop shopping offers an immediate, affordable way for you to meet your
business needs.
For more information
about financial solutions for the
middle market from CIT,
please visit www.cit.com

12. CFOPUBLISHING 11
Impacts of a New Lease Accounting Standard for the Mid-Sized Business
 Impacts of a New Lease Accounting Standard for the Mid-Sized Business is published by CFO
Publishing LLC, 295 Devonshire St., Suite 310, Boston, MA 02210. Please direct inqui-
ries to Linda Klockner at 617-790-3248 or lindaklockner@cfo.com.
CFO Research and CIT Group developed the hypotheses for this research jointly. CIT
Group funded the research and publication of our findings. At CFO Research, David
Owens directed the research and wrote the report.
CFO Research is the sponsored research group within CFO Publishing LLC, which in-
cludes CFO magazine, CFO Conferences, and CFO.com.
October 2015
Copyright © 2015 CFO Publishing LLC, which is solely responsible for its content. All
rights reserved. No part of this report may be reproduced, stored in a retrieval system,
or transmitted in any form, by any means, without written permission.