O&MM Fabricator - July/August 2016 - (Page 26)

BIZ TALK New Rules to Impact the LEASE VS BUY DECISION MARK E. BATTERSBY E ven as credit becomes more readily available, the question of whether to buy or lease is one the owners of many metal fabricating businesses face. While there is no one correct answer that fits every situation, nor every fabricator, compared to the simplicity of buying, leasing is far more complicated and may be getting more complex. Thanks to negotiations between the International Accounting Standards Board (IASB) which sets rules for many countries around the globe, and the U.S. Financial Accounting Standards Board (FASB) which writes the rules in the U.S., the lease accounting rules as we currently know them are changing. The new rules will soon require many businesses to add all but the shortest leases to their balance sheets as liabilities, 26 | July/August 2016 * O&MM Fabricator much like debt, affecting the way potential lenders, investors and suppliers view the fabrication operation. New Rules Today, few leases show up on the books because the accounting guidelines allow lease contracts to be structured to appear as simple rentals. The existing guidance under the Generally Accepted Accounting Principles (GAAP) states that businesses are only required to record lease obligations on their balance sheets when the arrangements are comparable to financing transactions. If an obligation is not recorded on a balance sheet, it makes a business appear less leveraged than it really is. According to the Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), business that lease assets - or lessees - will now be required to recognize assets and liabilities on their balance sheets for leases with lease terms of more than 12 months. Previously, the recognition, measurement and presentation of expenses and cash flows arising from a lease for lessees primarily depended on its classification as a finance (capital) lease or operating lease. But unlike current GAAP in the U.S., which requires only capital leases to be recognized on the balance sheet, the new standard requires businesses to include both types of leases on their books. Obviously, this is a huge change from current practice requiring lessees to record a large asset and a large liability on their balance sheet. Businesses will no longer be able to structure lease agreements to

Table of Contents for the Digital Edition of O&MM Fabricator - July/August 2016

PRESIDENT’S LETTER
LETTER FROM THE EDITOR
NOMMA Network
Supplier Members
NOMMA Education Foundation
NEW RULES TO IMPACT THE LEASE/BUY DECISION
HOW TO HIRE THE RIGHT PERSON - AND STAY OUT OF TROUBLE WHILE YOU’RE DOING IT
New NOMMA Members, Iron Club Members & Rust Free Club Members
Industry News
Media
Products
METAL MOMENT
Index of Advertisers

O&MM Fabricator - July/August 2016

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