In the wake of new financial disclosure requirements, operating leases are now expected to be treated as capital leases, if they do not meet this criteria:
- The lease automatically transfers ownership of the property to the lessee by the end of the lease.
- The lease contains a bargain purchase option.
- The lease term equals 75% or more of the estimated economic life of the property.
- The present value of the minimum lease payments at the beginning of the lease term equals or exceeds 90% of the fair market value of the property.
Those rules will have a huge effect on the copier leasing industry. Lease customers are scrambling to identify existing leases and a strategy to properly treat these on the books.
Most copier lease agreements carry options for fair market acquisition or $1.00 lease buyout. Each of these are likely construed as ‘bargain purchase option'. The ‘economic life' rule likely also applies, since a majority of equipment covered on leases are not continued through the term of the lease.
The treatment of most copier leases is to expense them as operating leases, when the new viewpoint is to treat these leases as capital leases. Restating financial statements is a real threat, considering over half of American businesses lease office equipment.
How can organizations avoid the lease question entirely? One solution is to purchase copies, not lease copiers. PageFleet, a company headquartered in Austin, Texas, with distribution and support centers throughout the United States, offers a ‘pay by the page' program that includes education, workflow support, hardware, software, and lease management.
"For the most part, leasing a copier has been a losing proposition for our clients. Often the equipment wears out before the lease payments, leaving the customer with an expensive refinance problem. The old copier payments must be rolled into a new copier lease contract, which substantially increases the cost. Now the new accounting rules will make leasing a thing of the past."
"Instead of leasing, we manage the real problem, while bringing in compliance and governance to the customer's document fleet. All costs are captured and billed on a transactional basis," said Harman.
According to Harman, "Under the PageFleet Plan, PageFleet satisfies the lease payment question and transitions customers into a consumption model. The plan manages the entire printer, fax, and copier fleet. Our application specialists continuously help the client reduce paperwork through training and implementation of paperless technologies. Network support, repair, parts, and consumables are all included and managed in a single, ‘price-per-page' billing agreement."
For more information on PageFleet, email Scott Harman.
About the Author
Scott H. Harman is a technology writer and President of PageFleet, a FINANCIAL Company, in Austin, Texas and has 30 years experience in finance, distribution, and manufacturing channels. Reach Scott at scott@pagefleet.com or Tel 512-250-3553.
Copyright, ©, Scott H. Harman, All Rights Reserved, 2005. Article may be reprinted as long as all links are maintained and author is notified of publication date and publication.
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