Stop Paying Evergreen Fees for Equipment Leases
Equipment leases are multi-year contracts with an important financial decision at the end of the term. At the end of a lease, lessees must decide if they want to renew, buy out, or return the leased equipment. On one lease, you may have a partial renewal, partial buyout, and partial return. Your choice at the end of term all depends on the circumstances and the needs of your users. Most companies lease with the intention of returning the equipment at the end of the initial term.
The end-of-term decision typically must be made at least 60 days before the lease ends so the lessor can be notified pursuant to the contract terms. All too often this process happens inconsistently, late, or not at all. A lack of action at the end of term, as with many contracts, can result in an “evergreen” lease. Failure to track equipment properly and proactively manage the end-of-term decision and logistics is the most common and costly error made in this spend category. Lessors know this and bank on it – it’s their business model. There are many three-year leases out there on their fifth year.
Large companies are the most common victims of end-of-term “spend leakage.” In these cases, when you add up all the payments (and calculate their present value), they exceed the cash purchase price significantly – often by 125% of what you would have paid had you bought the equipment. When this happens, what’s the point of doing a lease vs. buy analysis?
How to Reduce Evergreen Fees for Equipment Leases
To reduce evergreen fees for equipment leases you have to do two things in parallel:
- Triage your existing portfolio to remove evergreen leases
- Define and roll-out an end-of-term management process and best practices to protect those leases that are still within their initial term
Start by capturing all of your equipment lease documents, then:
a) Abstract the key data elements into a centralized database
b) Sort by dollar value and age of the evergreen payments
c) Triage the largest and oldest evergreen leases first
There are automated tools that can help you with the triage process. This will give you the best bang for the buck.
What Do Best-in-Class Companies Do?
- Track assets throughout their lifecycle to the end of term
- Notify current asset owners prior to the end of term with adequate time for analysis
- Add workflow for other stakeholders such as Procurement and Treasury
- Provide guidelines for making the end-of-term decision
- Provide performance scorecards for each stakeholder or group
Learn More about Enterprise Lease Accounting
White Papers, Handbooks, and Research Studies
With the deadlines for the new lease accounting standards approaching quickly, many companies are asking how software can help automate the tasks required for the transition period. US GAAP filers adopting ASC 842 will be required to provide three years of comparative reporting.
Learn the differences between contract-level and asset-level lease accounting in this technical white paper. Review examples of the impact of asset-level decisions, judgments, and events for material handling, data center, and IT equipment.
Considering lease accounting software to comply with the new FASB or IFRS standards? Download this eBook to understand the potential time and cost savings opportunities resulting from automation of lease classification and financial reporting.