Society has changed its attitude towards leasing. Attitudes of the past dictated that people saved for what they wanted, and purchased outright, but now few people save to buy - with the exception of deposits.
People are apt to sign up for credit with monthly payments to get things immediately so there’s the instant gratification of the now instead of waiting. Companies do follow suit with consumer attitudes, but often leasing choices for companies aren’t a mere whim, but carefully planned out choices as to which option would be best for the company. So, what will the trends and leasing industry habits be in 2018 and beyond?
What Are New Things You Can Lease Now That You Couldn't Lease 10 Years Ago?
Some of the surprising items for lease are items such as bikes, phones, books, sports and fitness equipment, pets (yes dogs), gardens, solar panels, boats, parking spaces, gadgets, cameras, Christmas trees, appliances, furniture and driveways. The list is long. People are often driven to lease these goods, or more common items such as cars because of an unstable economy. The economy has affected how people buy and what people buy, and more often people prefer leasing than being responsible for the entire amount to own an item.
Businesses can lease anything from art to barges to laundry equipment to ambulances. Whatever people want, when they cannot afford to buy or chose not to buy, leases are available.
What Don't People Lease Anymore?
Remember when supercomputers filled an entire room and were so expensive only people who needed “computing centres” had them? Or when TVs were like furniture with small black and white screens? Then technology became more mainstream in the 80s and 90s, and people could now buy or lease TVs and computers. People used to lease TVs in the past and even computers, but with the price of these goods now, some individuals (and companies) find that the bottom line isn’t worth the lease - because it’s so cheap to buy! Companies, however, may still choose to lease computers en masse if they don’t have the upfront costs or they will need to refresh their computers with regularity.
How Are Leases Structured Now Versus In The Past?
Whilst any informed company will look at the bottom line terms of any capital or operating leases, company leasing habits have changed. In the past, people may have kept the company car on the books for up to ten years - the logical life of the car - but with an increased consumer consumption, and with people often seeing a company car as a perk of the job, employees expect a new car model every two to three years instead of waiting out for the life of the car. That may mean more expensive bottom line costs for your company; however, it’s all about how companies negotiate contracts.
How Will IFRS 16 Affect My Company's Leasing Habits?
At the time when changes go into effect in 2019, any lease liabilities and associated assets go on the balance sheet of the accounting reports. Public companies already have to report their financials to their investors; however, prior to the change, some leased items didn’t need to be reported. As of right now, if your company undergoes an audit, they’ll look at your lease schedule and it gets recorded, but it doesn’t get reported on the balance sheet; it gets recorded as a note saying the company has these outstanding lease liabilities.
Usually, the reason that some leases got recorded only as a note is that if you commit to a lease there’s often a way to get out of the lease - for a fee and for some companies the fees are worth it - so some argue it doesn’t make sense to report it on the balance sheet because the company may not end up owing that money. You only record, usually, what you know you’re going to owe and pay. So, some companies have vehicles that they know they’ve committed to paying for, for a period of time - say, four years - but if the company wants to break the lease early, then the company just pays a fee and pays any interest due on the lease with no further expense.
Which leads to understanding the difference between finance (capital) and operating leases. With finance leases, the item always went on the balance sheet as an asset, including some leased vehicles the company has the option to purchase at the end of the lease terms. Operating leases didn’t go on the balance sheet as an asset, but were treated as an expense. Now both types of leases get reported in the same way; however, it doesn’t mean those are always the bottom line financial costs to a business - like in the case of breaking a lease early and realising the liability of extraneous costs.
Smart businesses will evaluate all of their options and choose the best option. The lease terms to lease an item might be really good, for example, and the buy price for this particular product or equipment might be too high, cost prohibitive - or vice versa. If overall prices are lower, and the lease terms aren’t favourable, then it’ll make more sense to sign a finance lease (or to buy). Smart businesses will analyse all of their options and choose the one that’s more favourable and profitable to them.
Leases are also used to offset risk - and going into the future this trend will be no different. If a company can get out of the lease and the terms are favourable - fees and interest payments - then that flexibility might be a choice that a company is willing to make. It’s smarter to analyse the overall goals of the company, look at the budgets, look at the different short-term and long-term impact of different types of leases - capital, operating, or even buying - and pick what’s best for the company.
With IFRS 16 things are changing and so the way you evaluate capital versus operating leases will inevitably change. It may sway a company to switch from one to the other, based on terms. What’s important are the terms you’ve negotiated on the lease, and whether it’s in your company’s best interest to buy or lease. However, often the cost of renting or leasing an asset has been deductible as a business expense. If you’ll own the asset at the end of the lease or hire purchase period, then it’ll count as a supply of goods for VAT purposes; again, it’s all about what works in the best interest of your particular business.
With IFRS 16 upcoming, all leases (except a few optional exemptions such as short-term and low-value leases) will be recorded on the balance sheet as liabilities with the assumption of the present value of future lease payments, and with a reflection of the right to use the asset over the lease term.
The Overall Trends
Consumer trends may see more leasing options available in 2018 and beyond; however, the IFRS 16 changes just mean that companies need to consider the benefits and downsides of each of their options - as do individual consumers. People want a larger turnover of newer products, but what do leasing companies do with that, say, three-year-old car? The market may change by offering cheaper leases on slightly older models. That might work for cars, but may not work for, say, computers. If there’s a constant demand for new tech, tech prices may go up, but as tech improves and production costs go down, prices could follow suit. It’s difficult to predict, but just as computers are now commonplace whereas they were cost prohibitive for the average user, even twenty years ago, cheaper production and material costs will only make items more accessible, which may mean companies replace equipment faster by leasing equipment or maybe even deciding to own it.
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