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AMTdirect Insights Blog

Equipment Lease Accounting: What Qualifies as an Equipment Lease?

Read all about equipment leases.

More than 80% of American companies lease equipment rather than purchasing it.

That’s a big number.

And the reason you should care about it is even more significant. When your equipment lease accounting compliance deadline rolls around, all of your equipment leases will have to be noted on your balance sheet.

In the past, this treatment was reserved for capital leases only.

But now the Financial Accounting Standards Board (FASB) and its sister governing boards have also decided operating leases - including equipment leases - should move out of the footnotes to join the party on the balance sheet.

But just what is an equipment lease according to the accounting governing boards?

There’s been a lot of confusion about it since FASB ASC 842, IASB IFRS 16 and GASB 87 were cemented.

Generally, we all understand equipment leasing: It’s a contractual agreement between a lessor and a lessee to use equipment for a specified time in exchange for periodic payments. 

But what a lot of private and public companies don’t understand is what all that entails.

That’s why we’re listing the typical items the largest industries will have to account for...so you can understand where to look for these equipment leases, who to involve, and how to abstract them.

 

Download the FASB 842 Equipment Lease Checklist

 

Equipment Leasing Timeline

There’s one important part of the new lease accounting standards to wrap your head around before diving into your equipment leases.

That’s the concept of lease duration.

This is the time period you’re leasing your equipment before it’s up for renewal. Simple enough, right?

This is important because under the new accounting standards, equipment leases that are less than 12 months long, aka short-term leases, are exempt.

You’re only on the hunt for equipment leases lasting 12 months or longer.

Making sure you and your team understand this concept will save you a lot of time and headaches.

 

Equipment Leases by Industry

Industries sometimes overlap in the equipment they use. But there are also specific types of equipment different industries are more apt to use.

With this in mind, we’ve created lists of equipment types for each industry. 

Business Services and Real Estate

  • Fleet or other company vehicles
  • Brand ambassadorships
  • Telecommunications equipment
  • Office equipment
    • Mail operations
    • Computers
    • Copiers
  • Company gym equipment

Healthcare

  • Diagnostic tools
  • Lab equipment
  • Medical devices
  • Office equipment
    • Computers
    • Copiers

Higher Education

  • Staff and student computers
  • Classroom technology
  • Furniture, eg. chairs and desks
  • Lab and research equipment

Hospitality

  • Drink dispensers
  • Kitchen appliances
  • Dining room furniture
  • Artwork
  • POS systems

Manufacturing

  • Forklifts
  • Shelving
  • Factory machines
  • Maintenance tools
  • Railcars

Retail

  • Point-of-sale hardware (cash registers)
  • Inventory scanners
  • Music speakers
  • Displays
  • Light fixtures
  • Mannequins

This isn’t a comprehensive list, but it’s starting point.

And take note: Many of these equipment lease types overlap into other industries. 

In fact, every industry will have to be especially vigilant about looking for embedded equipment leases in service agreements.

This is a common mistake companies have faced when locating equipment AND real estate leases for reporting on the new lease accounting standards. And no wonder - with countless service agreements, it’s an all-hands-on-deck scenario.

 

Teamwork Makes the Dream Work

Implementing the new accounting standards is an enormous challenge. And locating your equipment leases only adds an extra layer of complexity.

You’ll need to get your whole team on board to accomplish this as quickly and painlessly as possible.

Yes, we said it - every department should be involved.

  1. Human resources needs to weed through employment contracts. 
  2. Marketing can help by locating all vehicle advertising and brand ambassadorship contracts.
  3. Facilities maintenance should have agreements for artwork, gym equipment, lab equipment, wheelchairs, furniture and more.
  4. IT will have contracts for computers, copiers and any other technology.

No one person or team can find all of your contracts and abstract the leases alone. In order for you to successfully execute the new lease accounting standards, you’ll need to overcome any cross-department silos. 

 

Conclusion: Equipment Lease Accounting Compliance Made Easy

It’s no wonder so many companies lease their equipment: Buying and maintaining it is super expensive. And technology changes every year, so leasing ensures you always have the best-of-the-best on hand.

Leasing equipment is a must for your business. 

And now, adding those leases to your balance sheet is also a must for your business.

The truth is, if you're in an equipment-heavy industry, you could have thousands of contracts to go through in the short 120 days it takes, on average, to complete the new accounting standards.

Because finding all of your equipment leases is so painstaking, we’ve broken down the steps to handling equipment leases under the new accounting standards.

We’ve even created a free FASB ASC 842 Equipment Lease Checklist

It’s designed to help you organize your team, update your equipment leases, and stay on track with compliance.

Download the FASB 842 Equipment Lease Checklist

Posted on 7/29/19 9:00 AM by Taft Tucker in Lease Administration, in FASB, in Lease Accounting, in GASB

Taft Tucker

Written by Taft Tucker

Taft is the Chief Customer Officer at AMTdirect and is a resident expert about lease administration and accounting. Taft's passion is to share practical, helpful information about our industry.