The Road Ahead: IT Finance and the Proposed Changes to Lease Accounting. Rep Name Rep Phone

Transcription

1 The Road Ahead: IT Finance and the Proposed Changes to Lease Accounting Rep Name Rep Phone

2 Overview Joint project to propose changes: Federal Accounting Standards Board (FASB) International Accounting Standards Board (IASB) To address long-standing criticism of lease accounting: Too permissive of off-balance sheet treatment Overly complex Dominated by arbitrary rules Most controversial proposed change capitalization of all leases 2

3 Key Provisions Eliminates off-balance sheet treatment for most leases Companies that use operating leases solely for off-balance sheet treatment could no longer use this approach for equipment financing New asset Right to use the leased item Lease term to include more likely than not renewal periods Lease renewals and contingent rents to be continually reassessed 3

4 Key Impacts Pre-existing leases are not expected to be grandfathered Significantly more disclosure Financial covenants may need to be renegotiated Board to seek input about effective dates and transition 4

5 Discussion Topics Impacts On Action Items Financial Position and Profile Financial Reporting Costs Usage of Lease-Type Financing Prioritize Leasing Rationale Review Refresh Plans Assess Pre-Standard Need for Operating Leases Summary and Q&A 5

6 Impact: On Financial Position and Profile Leases for tangible assets represented in the balance sheet as a right-to-use asset and corresponding liability Depending on how much off-balance sheet financing has to be integrated into the balance sheet: Asset Turnover Ratio Debt-to-Equity Ratio EBITDA Pre-Tax Profit Return-on-Capital Cash flow would not be impacted (Lease vs. Buy Decisions) After-tax benefits still available 6

7 Impact: On Financial Reporting Costs Extensive levels of documentation Re-evaluate asset and liability values at each reporting period Could represent significant internal administrative costs Increased external audit costs 7

8 Impact: On Usage of Lease-type Financing Source: Survey of Senior Financial Executives, Fall 2009, Grant Thornton LLP 8

9 Impact: On Reasons for Leasing Reason for Leasing Raise capital Low cost capital Tax benefits Residual risk transfer Convenience Regulatory Accounting Details Additional capital source 100% financing Fixed rate Level payments Low payments/rates due to tax benefits, residual and lessor cost of funds Lessee can t use tax benefits and lease versus buy shows lease option has lowest PV cost Lessee has flexibility to return asset Quick and easy process often tied in with the sales process Capital issues Off balance sheet Status AFTER New Rules Implemented Still a major benefit especially for small- and medium-sized noninvestment grade lessees Still a benefit versus a bank loan Still a benefit Still a benefit Still a benefit Still a partial benefit if PV less than cost of asset Still a partial benefit if PV less than cost of asset 9

10 Action Item: Prioritize Leasing Rationale Many of the reasons for using leasing still remain Asset management process Protection against obsolescence 10

11 Action Item: Review Refresh Plans Financial incentive to lease still remains Shorter refresh cycles avoid higher lifecycle costs of years 4-5 Buy-and-hold models less attractive than lease-short-and-refresh models 11

12 Action Item: Assess Pre-Standard Need Determine need for extra PP&E Easier to get capital before you need it than after Marshal resources in preparation for post-standard world Assume worst case scenario: All operating leases must be capitalized in first reporting period 12

13 Action Item: Assess Pre-Standard Need Getting Return-on-Capital numbers up to pre-standard level without ability to invest in the PP&E necessary to productivity up to higher levels Three options: 1. Strategic: Borrow at elevated cost-of-funds rates after accounting change to get PP&E 2. Strategic: Purchase PP&E before accounting change 3. Tactical: Use operating leases with terms that end before accounting change to get PP&E into service without affecting balance sheet Option 3 represents an opportunity for organizations to exploit for the next 3 to 4 years. 13

14 Action Item: Assess Pre-Standard Need 2-3 year term operating lease (for leading-edge IT) = Lowest cash-out-the-door method for getting IT & production equipment into service Example Cash-flow comparison by term versus outright purchase ($1,000 asset) 14

15 Summary For IT assets, pressure to hold onto them longer than 3 years subjects organization to: Extra maintenance costs Inflated TCO costs Increased vendor support costs Increased risk of obsolescence Need to fast-refresh and rapid exploitation of technology innovations driven by: Pace of technology change Vendor support dynamics Increased dependency on these assets 15

16 Summary Large organizations will still leverage power & flexibility of leasing--- regardless of the changes Strategic use of lease financing for IT assets will continue to be driven by the business values of: Cash flow management Cost containment Flexibility Support for productivity gains Enablement of innovation Final effective date for accounting changes not likely to occur before

17 Q&A Macquarie Equipment Finance Craig Seipel National Account Manager Ph: macquarie.com/mef 17