Open-end Versus Closed-End Leasing: Which Is the Right Fit for Your Fleet?

An article in the January 2016 issue of Automotive Fleet focused on the fleet leasing industry and the cautiously optimistic approach it is taking to coming changes in accounting standards. The changes have reignited discussions about the leasing instruments that have become essential tools for procurement of fleet vehicles.

In the commercial fleet industry, leasing has become the dominant way companies acquire their vehicles. It is unclear what the Financial Accounting Standards Board’s (FASB) new lease accounting standards may have with regard to the fleet management industry when they arrive in early 2016, but fleet managers will need to assess the impact of lease obligations on corporate balance sheets and should initiate thoughtful, preemptive conversations with their finance departments.

Choosing a lease should always be undertaken with a clear idea of how the vehicle will be used in the field. Bryan Wilson, controller for ARI, noted that a lease would be considered a capital lease versus an operating lease if one of four factors is met. “The difference between a capital and operating lease comes down to the accounting guidance that governs leases,” Wilson said. “If at least one of the four criteria is true then the lease would be classified as a capital lease on the lesseeā€™s account books.”

A lease would be considered a capital lease if the ownership of the asset is shifted to the lessee, the lessee purchases the asset at below market price by exercising a “bargain purchase option,” the lease term encompasses at least 75% of the useful life of the asset, or the present value of the minimum lease payments plus any lessee guarantee is at least 90 percent of the fair value of the asset at lease inception. In the present leasing environment, a capital lease would be added to a company’s balance sheet while an operating lease could be kept off the balance sheet, a situation that will likely change under the new accounting standards.

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