Accounting standards for leasing procurement making you think, should you lease or buy IT equipment? How do the IASB & FASB revised regulations impact your procurement cost?

1. ARTICLE | May | 2013
Abstract:
The International Accounting Standards Board (IASB) and
the Financial Accounting Standards Board (FASB) have
jointly revised the Accounting standards for leasing
procurement, which will be effective for enterprises
beginning in 2017 and required to be incorporated in
accounting records from 2014. This article will discuss key
implications of the revised regulations on enterprise IT
procurement strategy.
Impact of revised IASB/FASB
regulations on IT Equipment Leasing
Copyright © Beroe Inc., 2013. All Rights Reserved
Author
Rakshana B | Research Analyst

2. Overview – Release of Revised Exposure Draft for Lease Accounting
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have
jointly devised new guidelines for leasing to improve the financial visibility of the company to investors. After the
release of the first draft in 2010, the revised Exposure Draft was postponed throughout 2012 and was finally
released in Q2 2013.
IT assets on lease are generally recognized as a capital/finance lease or an operational lease. In a capital lease,
the equipment is recognized as an asset and liability in the financial statements, whereas in an operational lease
the assets are usually relegated to the footnote of the financial statements. Historically, operational leases have
been preferred because the company can account for the cost of the equipment as an operational expense.
However, with the release of the revised standards, all leases will henceforth be capitalized.
The impact areas on IT procurement are:
● Increase in lease cost heads in a Buy vs. Lease analysis
● Negating the advantage of off-balance sheet accounting of leasing which was a driver in influencing the
leasing procurement decision
Low
High
Product Obsolescence
Lease
Duration
HighLow
Low
High
Operational Lease
Computing Hardware
Telecom Equipment
Printer Equipment
Servers
Network Equipment
Impact on IT Equipment Leasing:
IT equipment procurement will be highly impacted by the revised regulations as they are primarily funded
using the operating lease model due to high technological obsolescence and unprofitable buy-out options
as demonstrated in Fig.1.
High Medium LowImpact
Capital Lease
Fig.1. Comparative Study of Impact on Lease Types
Medical
Equipment
Aero planes
Real Estate
Fleet Leasing
Construction
Equipment
IT and Office
Equipment
Impact on IT Leasing
by Equipment
Off-Balance Sheet
accounting of assets and
liabilities will no longer
be a driver to adopt IT
equipment leasing.
“Nearly 80% of IT
equipment leasing is on
PCs (Computing
hardware), due to higher
volume of PC
procurement over other
infrastructure
equipment.” – Steve
Bossert, Director of
IT Asset Management
Group

3. Higher volumes involved in computing hardware sourcing, in comparison to other IT equipment, usually
results in the adoption of a leasing model, primarily an operational lease, due to economic viability through
economies of scale.
Based on the new regulations, combined with the evolution of the supply landscape and technological
enhancements, the IT hardware equipment would be procured in the following manner.
IT Equipment
Procurement Model –
Lease
Is lease still
economically
profitable over
buying?*
Procurement Model – Direct
Purchase
Procurement Model –
Infrastructure as a service
Procurement Model - Hybrid
Managed Print Services Direct
Purchase
Yes
Network EquipmentServers Telecom EquipmentComputing Hardware Printer Equipment
No
Fig.2. Procurement Model – Decision Making Criteria and Opportunities
“If you have the systems,
processes and practices in
place to comply with the new
standards, then your
organization can continue to
lease and focus on the
economic benefits of
leasing.” – Michael J. Keeler,
CEO of LeaseAccelerator.
The revised regulations will require the buyers to reassess the Buy vs. Lease analysis to verify if
the increase in lease cost heads proves unprofitable over the contract duration. This will drive the
adoption of alternative optimal cost procurement models for IT hardware for which the decision
making criteria and opportunities are represented in Fig.2.
*Assuming that the accounting practices comply with the new standards to complement the adoption of leasing model
Buyers can look to
outsource lease services
which include software and
expert assistance. For
example, LeaseAccelerator
is a cloud based accounting
software which helps
lessees in streamlining
portfolio management,
accounting and reporting as
per the new standards.
Some of the major clients
currently adopting
LeaseAccelerator are
NetApp, Cummins and
Eaton.

4. As per the revised accounting, the lessees can choose from two major leasing models: Right of Use
Lease model and Short Term Lease model. The Right of Use model will entitle the lessee to include the
assets as a Right-Of-Use (ROU) asset and the liabilities as lease liabilities on the balance sheet, thereby
essentially capitalizing all leases. The short term lease model allows the lessee to avail a maximum period of
12 months for the lease (including renewal).
The short term lease model, which can be classified as an operational lease, can be used for temporary
replacement of IT hardware or provision for a temporary worker on an ad-hoc basis.
Effect of Revised Regulations:
To enhance the leasing and financial visibility of the company, the revised regulations mandate that all
equipment leases should be considered as capital leases based on the following standards:
● Asset ownership and risk is transferred to the lessee at the end of the lease term
● The lease has a bargain purchase option
● The asset is leased for more than 75% of the useful life of the asset
● The minimum lease payment is 90% more than the current fair market value of the asset
Accounting Ratios that will
be modified
● Debt/Equity Ratio
● Return On Assets
Leasing Model Types
Capital Lease Operating Lease
Right of Use Model Short Term Lease
Current State
Future State
Fig.3. Leasing Model Types – Current and Future State
After the effective date,
enterprises will be
required to stay in
compliance with not just
FASB and IASB but also
external regulations
such as Sarbanes-Oxley
Act.

5. Impact Areas:
The new standard will require a revisal of accounting processes for those businesses using operating
leases. This will impact the administrative complexities resulting in:
● Having to track the deferred income tax which was not required earlier for operating leases
● Necessity to separate the lease and non-lease components(such as maintenance, insurance etc.,)
● Having to track additional data elements from the lease, such as asset depreciation and economic
incentives for lease renewal like bargain renewal rates, borrowing rates etc., on a quarterly basis
In a decentralized leasing environment, the revised regulations will result in increased complexity in
accounting for operating leases from different sources and aligning it to the new regulatory standards. This will
increase the administrative costs by additional expenditures on accounting automation software and
expertise.
The direct costs such as monthly lease payments and end of lease purchase (bargain purchase or one dollar
purchase options) will not be impacted by the revised accounting standards. However, indirect cost
component of tax payments will be revised due to the capitalization of leases.
Implementation Timeline
The effective date of implementation for businesses is expected to be between three to four years post the
issuance of the final exposure draft (ED). With the release of the revised ED in May 2013 and the expected
final ED in early 2014, the effective date of implementation could be as soon as the beginning of 2017.
First Exposure Draft
Issued in 2010
Revised Exposure
Draft in 2013
Final Exposure Draft
2014
Effective Date of
Implementation 2017*

6. Conclusion - Action Plan for Buyers:
All lessees will be required to conform to the revised accounting standards beginning in 2014, as it is required
to show a 3 year accounting record prior to the effective date. Although the revised regulation will negate the
advantage of off-balance sheet accounting and increase the administrative complexities, leasing can still be a
profitable sourcing decision provided that buyers have the accounting practices in place to comply with the
new standards and a well-structured buy vs. lease analysis.
Keywords Used
FASB, IASB, Revised exposure draft, IT Equipment Lease, Right of Use Model, Tax Payment
References
http://lesseeadvocate.com/newsletter/?newsletter=Coming%20Lease%20Accounting%20Changes
http://lesseeadvocate.com/2011/07/ready-for-the-ifrs-lease-accounting-changes-fear-not-%E2%80%93-new-whitepaper-
can-help-you-prepare/#more-328
http://www3.cfo.com/article/2012/7/gaap-ifrs_fasb-iasb-lease-accounting-equipment-leases
http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=900000011123#decisions
http://www.kpmg.com/uk/en/issuesandinsights/articlespublications/pages/draft-leasing-standard-fasb-leasing-project.aspx
http://www.pwc.com/us/en/cfodirect/issues/leases/index.jhtml
“The lease vs. buy
decision is an essential
calculation that buyers
should make to compare
lease and buy cost heads
over a period of 3 years.
It includes current and
future costs. The
decision to adopt a lease
will also be influenced by
the internal policy of the
company to lease and the
current borrowing rate.”
- Erik Grissell
Global Indirect Sourcing
at Nortek