{"id":1443,"date":"2011-11-22T17:09:14","date_gmt":"2011-11-22T17:09:14","guid":{"rendered":"http:\/\/www.theweekinimaging.com\/?p=1443"},"modified":"2011-11-22T17:09:14","modified_gmt":"2011-11-22T17:09:14","slug":"sales-pitch-everything-you-wanted-to-know-about-the-changes-to-lease-accounting-standards-but-didnt-think-to-ask","status":"publish","type":"post","link":"https:\/\/www.enxmag.com\/twii\/the-week-in-imaging-twii\/sales-and-service\/2011\/11\/sales-pitch-everything-you-wanted-to-know-about-the-changes-to-lease-accounting-standards-but-didnt-think-to-ask\/","title":{"rendered":"Sales Pitch: Everything You Wanted to Know about the Changes to Lease Accounting Standards but Didn\u2019t Think to Ask"},"content":{"rendered":"
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David Ramos<\/p><\/div>\n

When I was hired at the Xerox Corporation as I started my career in sales, I learned quickly that math and understanding numbers were requirements for being successful in my new profession.\u00a0 In the new hire kit (that was handed to me on DAY 1 as I was on boarded) was a book titled, Selling Finance Solutions<\/em>.\u00a0 It was required pre-reading before being sent to the famed Leesburg, VA campus (a place I attended classes so often, I felt home in their dorms and underground tunnels).\u00a0 Selling Finance Solutions taught the nuances of leasing and positioning our different financial vehicles for moving our solutions and where I was first introduced to the FASB 13 (Financial Accounting Standards Board statement 13).\u00a0<\/p>\n

Why do I start with this story?\u00a0 Because I was conducting an Account Planning Session (APS is a strategy session with sales people to coach them and help them pre-plan for targeting accounts and developing existing accounts) with a sales executive today and we were discussing a proposal he created and I asked him how he was positioning the financial component and if he understood the impact and benefit to the customer.\u00a0 Silence was his answer.\u00a0 I asked him if he understood why the customer was asking him for detailed MSRP, cash pricing\/discounting figures and other financial details regarding term commitment and Fair Market Value buyout figures at the end of the term.\u00a0 Silence again was his answer.\u00a0 I asked him if he had ever heard of FASB 13 and when was the last time he picked up something besides the sports page to read\u2026you know how this movie ends, right?\u00a0 I don\u2019t have to tell you he sat there silent again, do I.<\/p>\n

New Leasing Proposals Will Change Business<\/strong><\/p>\n

One of the hottest topics in lease accounting today is the proposed changes<\/a> to the current lease accounting standards. Proposed changes to accounting rules would force all operating leases to be capitalized.\u00a0 If approved, this fundamental change would require companies to capitalize operating leases they traditionally keep off their balance sheets, such as those for real estate and equipment like Multi-Function Devices (MFDs). \u00a0These changes to lease accounting rules will have a major impact on U.S. companies and will impact return on assets and other key financial ratios significantly. Treating lease obligations off the balance sheet helps companies, but that will likely come to an end as early as 2012.<\/p>\n

Today, FASB 13 requires that operating leases are classified as an off-balance sheet transaction and only the current year operating lease expense is accounted for in the income statement. Corporations must also include a note in their Security and Exchange Commission 10-Q and 10-K filings detailing the anticipated rent expense for the next five years.<\/p>\n

Operating vs. Capital Leases<\/strong><\/p>\n

An\u00a0operating lease<\/strong>\u00a0contract is similar to a rental contract: The lessee pays fees for the life of the lease and simply uses the goods (e.g., an MFD or computer system). The lessee reports these costs as operating expenses (and thus lowers taxes in this way), but takes no depreciation\u00a0expense.<\/p>\n

Capital leases<\/strong>\u00a0are more like financed purchases, that is, under the terms of the lease, the lessee may immediately gain some of the benefits of ownership, such as charging depreciation expense (and taking tax benefits from that), and recognize the asset on the balance sheet\u00a0as a capital\u00a0asset.\u00a0<\/p>\n

\u00a0FASB 13 Ruling on Operating vs. Capital Leases<\/strong><\/p>\n

\u00a0<\/strong>The United States\u00a0Financial Accounting Standards Board statement 13 (FASB 13)<\/em> provides the definitions and criteria for deciding whether or not a\u00a0lease\u00a0agreement is to be considered a purchase\/sale agreement (and therefore a\u00a0capital lease<\/em>) or a usage agreement (and therefore an\u00a0operating lease<\/em>). The distinction between capital and operating leases has important financial consequences: it determines who (lessor or lessee) has ownership rights and who takes\u00a0depreciation\u00a0for the leased goods, and who can treat lease costs as\u00a0expenses, along with other factors.<\/p>\n

\u00a0Very briefly, FASB 13 states that a lease will be considered an operating lease (usage agreement) unless one or more of the following four criteria are met. If any of the following applies, the lease is then treated as a capital lease (purchase\/sale agreement):<\/p>\n