The fact is that there are ways for organizations to structure leases that can both meet the balance sheet needs of the organization and at the same time build in flexibility. They’re a form of hybrid lease. Here’s how it works:

The driving force behind operating lease qualification is FASB 13, an accounting rule. This rule is fairly flexible in the requirements of reaching operating lease qualification. As a result a number of hybrid structures are available. One of the key attributes of any such hybrid is to pass the FASB 13 standard of the present value of the rents being less than 90% of the equipment cost. The definition of minimum term allows for the use of early termination options as a way for the 90% rule to be satisfied.

Another method that can be used to move around the FASB requirements is to have an asset that has long term excellent residuals, for instance Cisco equipment, and to have a five-year operating lease with a four-year early buyout option. Because the buyout is an option, it is not included in the FASB calculations. This structure allows you to set an early buyout option number that is consistent with what you believe the cost of money should be for the term chosen and the risk which exists for the leasing company.

Action Item: It is very important in managing your leasing activity that thought be given to getting rid of equipment at the end of the lease. If you don’t believe that you have the ability to manage the asset to a specific return date, then, if you need to have an operating lease, you should consider working with partners and establishing hybrids like those described above to help you through the accounting maze.

Footnotes: Contact David Burmon