Gartner Research

Beware the Effect of the Operating Lease's Demise on Finance and Real Estate

Published: 30 August 2013

ID: G00249343

Analyst(s): Rob Schafer

Summary

The recently revised Exposure Draft of the FASB-IASB's lease accounting standards is a significant step toward eliminating the off-balance-sheet operating lease. Corporate finance, IT and real estate executives should start planning now for its material impacts, likely to be felt as soon as 2015.

Table Of Contents
  • Impacts

Analysis

  • Key Question: When Must I Implement the New Standards?

Impacts and Recommendations

  • The likely demise of off-balance-sheet operating leases means that cloud computing in general, and SaaS, PaaS and IaaS in particular, will grow more attractive as off-balance-sheet replacements for operating-lease financing of on-premises IT infrastructure
  • The shift to owned, capital assets is likely to lengthen the relatively short refresh cycles associated with operating leases and drive higher asset disposition costs for older equipment
  • The most severe impact will be on corporate real estate and lease administration, as the largest operating-lease commitments are typically real estate and facilities leases
  • While the operating lease's off-balance-sheet accounting benefit is likely to be eliminated, the benefits of FMV financing will remain for shorter-term (up to three-year) lease terms

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