As companies wrap up their implementation of the new lease accounting standards, it is time to think about how business decisions may change as a result of the new rules. In a phone interview with Bloomberg Tax, Sheri Wyatt, a partner with PwC’s Accounting Advisory practice, talked about a few ways business decisions could be affected and what companies need to take into consideration when making decisions due to the new lease accounting standards.
Lease vs. Buy
With all the new leasing rules, one question companies might have is whether it still makes sense to lease or is it more beneficial to buy. Wyatt said that historically, many companies were attracted to leasing because under the old rules, companies could keep their leases off-balance-sheet. Now, under the new leasing standard ASU 2016-02, companies are required to recognize all leased assets and liabilities on their balance sheets.
“With the advantage of keeping assets off balance sheets going away, companies need to re-evaluate their lease vs. buy decisions,” Wyatt said. She emphasized that the decision should be made based on what is more economically beneficial to the company.
She went on to say that real estate assets require a bigger investment, it makes more sense to lease these assets for a longer term. So, overall building leases will likely remain more attractive to retail companies. Additionally, for rapidly depreciating equipment, leasing will also remain more attractive than owning.
Wyatt believes that accounting shouldn’t drive changes in strategy. “We may start to see more short term leases, leases with more renewal options, and leases with more variable payments (as opposed to fixed payments). But, short term leases may require economic trade-offs. The shorter the lease terms are, the more exposure companies have to risks such as pricing risks,” she added.
The bottom line is that companies need to weigh the costs and benefits when making their lease vs. buy decisions.
Compliance vs. Transformation
While some companies are treating the implementation of the new lease standards as pure a compliance exercise, others are treating it as an opportunity to transform and introduce new processes to their business.
According to Wyatt, companies are using this opportunity to make changes that they would have delayed or possibly not made. Some have decided to make specific changes, such as how they manage equipment life cycles (for example automating the lease termination process), and others have decided to implement broader changes, such as integrating automated processes that can help them better administer their leases.
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